Partner / Investor what`s fair?

boeenterprisesboeenterprises subscriber Posts: 1
edited August 2009 in Business Planning
Hey Guys,
One of my wife`s friends is interested in helping out with our business. Initially I was excited simply due from the workload (promotion, dealing with customers/vendors, data entry, etc, etc) but as it turns out the friend simply has zero time to put into the biz (and is on dial-up, 99% of our biz is online).
BUT they do have money to help out on things which would mean more funds for promotion, etc, etc.
So, my big question is if we take the friend on to help out with cash, we (wife and I) are still doing 100% of the work.
How do we divide profit between us and the friend?
50/50 does not quit seem fair (we`re also providing funds).

Comments

  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    As Edward says - the simplest method is to distribute ownership according the amount of capital invested. However, that approach may not yield acceptable results for all parties.
  • doledole subscriber Posts: 3
    Hello,
    Like the other contributor said, there can be a lot more variables at play here. The most objective and simple way to split earnings is to split it in terms of ownership or share of stock in the company. However, if I were to take someone elses money, i would have evaluated my stock price first. (This is true, even if you are a partnership and not a corporation). So, i would have assumed a 1000 stocks of the company and calculated what are my earnings (E) per each of those 1000 stocks (simply: year end earnings divided by 1000). Then, i would have estimated a P/E (price per earnings) multiple. P/E is the price of each stock per the earnings number (E) we calculated. This is a little tricky and this is what determines how much stock you will give up for the money that your prospective partner is willing to put  in. Essentially, if you are a service business and your business is dependent on your personal day to day work (e.g. landscaping, laundry) then you can think of your P = E. If you have a brand name or reputation or any other intangible assets that can potentially drive a lot of business to you in future, then P>E by varying multiples. The key thing to understand is that if you peg your P/E equal to 2, you are telling your investors that it will take them 2 years to make all their money back from the investment they make. If you calculate P/E to be 3, 3 years... and so on.So, lets assume that P/E is 2 in your case for calculation sakes. Also, lets assume that your early earnings are $1 million. Then, your E (earnings per stock) is 1 million divided by 1000 = $1000. And since your P/E is 2, you will ask for 2 times 1000 = $2000 for each stock you give up. If you give up 400 stocks, you should get $800,000 for your business. In return, the investor should get 40% of your company`s earnings.I know.. this is a thick explanation! Hope it made some sense at least!
  • boeenterprisesboeenterprises subscriber Posts: 1
    Thanks for all the responses.
    Basically, as of right now nothing is coming in from the business.
    All funding is coming from everybody`s day job and all effort to get things going is coming from myself and the wife. So there are not any salaries being paid.
    The friend has more money to put into the business than we do, but they do not have any time. My big question is what would be proper compensation? (also, the money the friend is investiog is not a lump sum).
    I`m tempted to offer them their investment plus (for example) 10% back, but this might not be fair as some products being sold have a higher profit margin than others.
    I know there`s not a simple answer, I`m really looking for suggestions.
    It would be simple if they were doing 50% of the work and we matched them dollar for dollar, but it`s not.
  • doledole subscriber Posts: 3
    in this situation, you have two options. 1) to decide with your friend whether you can arrive at a stock valuation for each time they invest in you OR 2) take money from your friend as a loan each time you take money from them for which you will pay a certain interest rate over a certain period of time. option 2 is very simple as long as you have agreed upon the numbers and written everything down. For you, you have to be careful though, because if you are not able to repay, then you are liable in terms of your assets.
    Hope this helps. Since its all up in the air for you right now, feel free to ask more questions or lead define your situation better to this forum.
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    A couple of additional thoughts:
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