fcakes Posted 29 Apr 2012 , 4:11pm
post #1 of

Hi!

I have been approached by a family friend who wants to invest in my business to set up a retail store.

He wants me to invest 50%, he will invest 50% and we will share whatever profit/loss the business brings equally. However, I am also bringing my expertise & know-how to the business.

I want him to invest financially in the business, I will bring my knowledge and skills and we can share the profits 50-50. How do I word such an agreement? Is it even possible?

Another option I was thinking of is, he buys out my brand/business, and he will also get all future customers/current clientele. I will still continue to contribute with my skills/baking/decorating the products. In that case, do I take a salary from him for that? Or is there any other way to set this up?

Or do I have him fund my retail store, like a venture capitalist/angel investor? Has anyone done anything like that before? How does it work for a bakery/cupcakes business?

Any advice and other ideas on setting up this business is really appreciated. Thanks!!

21 replies
RVCupcake Posted 29 Apr 2012 , 4:26pm
post #2 of

You could contact a legal advice or something. Like a lawyer or someone on how to word that document or what the procedure would be. I wouldn't sell him my ideas. They are your ideas after all...who knows ..you may make big someday with your ideas icon_smile.gif

fcakes Posted 29 Apr 2012 , 4:49pm
post #3 of

Thank you RVCupcake. Yes, I am going to contact a lawyer but I also wanted to get the input of those in this industry who have been through such a situation before... icon_smile.gif

Anyone?

MimiFix Posted 29 Apr 2012 , 5:33pm
post #4 of

A partnership can work in the best of circumstances. But usually circumstances are not ideal... If the friend has no business experience and no baking experience, letting him have a voice in decision-making can present serious problems. I suggest you first speak with an attorney who can help you make a list of important issues and suggest ways to form a partnership.Then have a serious discussion with this family friend.

As much as your CC friends can contribute opinions, we are not trained in all aspects of expert legal advice. Good luck.

CWR41 Posted 29 Apr 2012 , 5:50pm
post #5 of
Quote:
Originally Posted by fcakes

He wants me to invest 50%, he will invest 50% and we will share whatever profit/loss the business brings equally. However, I am also bringing my expertise & know-how to the business.

I want him to invest financially in the business, I will bring my knowledge and skills and we can share the profits 50-50.




But who does all the work? If it's you, I wouldn't split 50/50... you're bringing more than 50% to the table.

Quote:
Originally Posted by fcakes

Another option I was thinking of is, he buys out my brand/business, and he will also get all future customers/current clientele. I will still continue to contribute with my skills/baking/decorating the products. In that case, do I take a salary from him for that?




If you're staying on as an employee after selling your business, of course, you'd be paid as an employee--unless you're volunteering to work for free during a transition period or have your temporary salary included in the sale.

costumeczar Posted 29 Apr 2012 , 6:02pm
post #6 of

I agree with CWR41...that 50/50 seems pretty bad when you think about who's going to be doing all the work. I'd think twice about that, or at least let him be the investor but you make the decisions. If he wants to come in and tell you what to do then he could really screw things up.

fcakes Posted 30 Apr 2012 , 11:21am
post #7 of

Great! Thanks for the input! This is what I was looking for because I wasn't able to figure out if 50/50 was a good idea icon_smile.gif

If he becomes an investor, I would ask him to invest 20%, 30% or 50% and share profit/loss accordingly right?

trebakes Posted 30 Apr 2012 , 12:11pm
post #8 of

HE wants to invest in YOUR business and take it to the next level. What do YOU want? I'm not a lawyer or anything like that or even in business but IMHO, he's getting all of the advantages of your hard work over the years buliding up YOUR clietelle and recipes. I think HE should provide ALL of the money and maybe get 50% (or less) of YOUR profits as a SILENT partner.

TheSweetTreat Posted 30 Apr 2012 , 12:26pm
post #9 of

If he gets 50% of all of your future profits just for offering up 50% of the startup..then I'm in the wrong business. 50/50 sounds like a sour deal if you're the one who is doing the baking. There'd be no business if it weren't for you creating the goods. I would find out what may be standard in these partnerships, but 50/50 for your situation sounds like a bad deal for you.

fcakes Posted 30 Apr 2012 , 8:22pm

Thanks so much for the input! I think him providing all the investment and taking 50% of the profit sounds good to me but how do I put it across to him?

Yes, I will be doing all the baking/decorating/managing the kitchen/inventory etc. He will be there day to day, supervising staff and handling the cash register/customers.

CWR41 Posted 30 Apr 2012 , 11:19pm
Quote:
Originally Posted by fcakes

Thanks so much for the input! I think him providing all the investment and taking 50% of the profit sounds good to me but how do I put it across to him?




Of course, that sounds good to you... HE provides ALL the investment and has 100% of the risk! As an investor, I wouldn't do it... why would I want to share 50% of my profits with anyone who had none of the risk? That's not a partnership.

Quote:
Originally Posted by fcakes

Yes, I will be doing all the baking/decorating/managing the kitchen/inventory etc. He will be there day to day, supervising staff and handling the cash register/customers.




It sounds like he's going to put in just as many hours as you would.

fcakes Posted 1 May 2012 , 12:07am
Quote:
Originally Posted by CWR41

Quote:
Originally Posted by fcakes

Thanks so much for the input! I think him providing all the investment and taking 50% of the profit sounds good to me but how do I put it across to him?



Of course, that sounds good to you... HE provides ALL the investment and has 100% of the risk! As an investor, I wouldn't do it... why would I want to share 50% of my profits with anyone who had none of the risk? That's not a partnership.

Quote:
Originally Posted by fcakes

Yes, I will be doing all the baking/decorating/managing the kitchen/inventory etc. He will be there day to day, supervising staff and handling the cash register/customers.



It sounds like he's going to put in just as many hours as you would.


then what do you suggest? I invest 50% plus bring my skills too?

traci_doodle Posted 1 May 2012 , 12:18am

I would be very wary of this situation. Are you and your family friend both the kind of people that can be objective and see both sides in an emotional issue? There's a lot of potential for things to go wrong. I'm not in business, but I've read a few small business books. I know that doesn't make me any kind of expert, but I just wanted to say that they suggested going over every scenario with your potential business partner ahead of time, and put it in writing, with a lawyer guiding your way (and make sure it's a lawyer who is not favoring one side over the other). Be sure to go over the "what-if" scenarios, such as if business is not going well, or one person wants to quit and the other wants to keep going, etc. Good luck!

auntginn Posted 1 May 2012 , 12:28am

Nope... how many yrs (or time) did it take you to get to this point. What skills did you acquire, what classes did you pay for and take. What about all the material you already invested to get where your at. All of those are already part of your investment.

If he puts up $1,000.00 (just saying) and its a 50/50 your part would be $1,000.00 but... you spent $500.00 in classes, cake pans and other supplies, business cards, R&D, etc. Then your part would be $500.00 cash plus all this knowledge and supplies & materials.

Further more, what about the customers you already have, do they come along with the partnership or do you retain them as yours.

Then, you should also discuss the possibility that the partnership does not work out as planned and you would like to go your separate way. Who gets what in this case. People don't get married on bad terms but they sure divorce on them, that's what there are prenuptials. You should treat this as a marriage because you will spend a lot of time together.

These are more questions to ask both an attorney & your friend.

CWR41 Posted 1 May 2012 , 4:15am
Quote:
Originally Posted by fcakes

then what do you suggest? I invest 50% plus bring my skills too?




I'm not suggesting anything... there are too many scenarios.

HE wants a 50/50 equal partnership
YOU want a buy out (he'd be the owner, you'd be the employee)
OR, you want a silent partner/investor (who would be paid a percentage of profits until the "loan/investment" is paid off)

The two of you need to decide if this is a partnership, buy out, or a loan before you can continue.

Here are some thoughts to consider... If he's wanting to work daily too, his skills are worth something as well. If this is going to be a partnership, and you want it to be successful, neither one of you would leave your skills at home. (Also, everything comes to an end - your contract will need an exit plan.)

In a partnership, both parties need to bring something of monetary value. If either one of you tries to "sell" the other on the idea that you should make them a "partner" without having a tangible contribution, it won't work. In most cases, one party needs/wants the money, but the person with the money doesn't need the other--that's what employees are for. The person who may not have much to contribute other than "good people skills" or a knack at something, or offers to provide help in other ways will never be considered an equal partner by the one who actually paid for (pays for) and owns everything else. And, what happens when the person who offers alternate contributions conveniently stops what was promised, like showing up for work at the crack of noon, works for an hour, takes an hour lunch break, then goes home? These are a few things to consider when it's not a 50/50 partnership from the start.

fcakes Posted 4 May 2012 , 8:51pm

Thank you everyone for the great advice! I have good material to go through with my lawyer to see if this can be a viable proposition! Really appreciate your help!! icon_smile.gif

johnson6ofus Posted 6 May 2012 , 4:35am

Wait, wait, wait....

"Profit" is what is left over AFTER the expenses are paid, which includes salaries. It is important that you recognize that you hold TWO positions now- 1. Investor that "owns" the business, and 2. Baker/ decorator.

Look at a $100 retail price cake. You spend $20 on the ingredients (eggs, flour, sugar, etc.) , $5 on the supplies (boards, ribbon, supports, etc.), $3 on the "rent" or space use, $2 on the "use" or depreciation for your tips, pans, supplies. Then you spend 3 hours making it at $20/hr, so $60 dollars "salary". What's left? $10 "profit". As the "owner", you get the salary and the profit= $70. So if you have a partner, you split the profit.... $5 for the partner, and $65 ($60 salary +$5 profit) for you. NOT $35 each, because your salary IS NOT part of the "profit".

If the partner has skills that are "worth" something to the business, then the partner also gets a salary and a profit share. But maybe the partner only mops floors well... so the partner gets $8/ hour salary, and then the added profit share.

This is the obvious "sticky" part. What are your skills worth to the business per hour? What are the partner's skills worth?

I agree with a PP that said ask a lawyer... but if you think it out a bit before you meet, you will save money (as you are billed per hour).

Last, NEVER sell 50%. 49% maybe... but you need a legal option to "break a tie", if you disagree.

My hubby and son partner in a business flipping houses. Son draws $20/ hr, but more experienced/ skilled Dad draws $40/ hour. What is left after expenses, is split 50/50. Son has control, but calls in Dad when needed.

A partnership is answering..
1. Who makes the decisions- 51% partner?
2. Who draws a salary, and what is that salary amount?
3. How can you dissolve the partnership or buy the other out?
4. Who "owns" the intellectual property- like recipes?

Good luck--- lots to think about....

fcakes Posted 6 May 2012 , 12:29pm

thank you johnson6ofus! those are all GREAT points to think about... appreciate your input! very sticky situation... i'm getting wary of it... :-/

if I were to start my own retail outlet and wanted to raise funds, how does investing and sharing work then?

If someone wants to invest, say, $5000, then it acts like a loan right? And I pay them back the amount accordingly? Maybe I could ask him to invest when I start my own thing?

jason_kraft Posted 6 May 2012 , 3:16pm

Getting business loans will be very difficult in today's environment. If you need startup capital and this person can provide that, you can structure the deal as equity (where the investor would get a percentage ownership of the business and potentially share in the profits) and/or debt (where the investor would be guaranteed payments over a specific time period).

Since a startup company usually won't be profitable for at least a year or two, an investment in exchange for equity is probably more realistic.

Another alternative is microfinancing, where you take out small loans from different individuals around the country. One example: http://www.opportunityfund.org/about/small-business-loans/microfinance

All of this is contingent on having an airtight business plan with clear competitive advantages and a quantified path to profitability.

fcakes Posted 6 May 2012 , 10:44pm

thank you so much Jason!! Investment in exchange for equity is the EXACT term I was looking for but couldn't explain it well enough!!!

What you said is just what I had in mind - this person has the money and inclination to invest.

I will consult a lawyer on this but any ideas on how to structure the contract, as in, how much equity and share in profits?

jason_kraft Posted 6 May 2012 , 11:26pm
Quote:
Originally Posted by fcakes

I will consult a lawyer on this but any ideas on how to structure the contract, as in, how much equity and share in profits?



There's really no good single answer to that question, it will entirely depend on the circumstances of your business, the quality and projections of your business plans, your own sales and negotiation skills (or those of your representative), and the risk tolerance of the investor.

If you look at it from the investor's standpoint, let's say he will be kicking in $30K seed money, and your business plan projects net profits for the first 5 years as -$5K, $0K, $5K, $10K, and $15K. That's $25K total profit, so even if you granted the investor 100% of the profits he would still have a negative return after 5 years, and unless there was a solid basis for exponential growth in the following years the investor probably wouldn't be open to an equity deal at all.

fcakes Posted 9 May 2012 , 3:01am

Thank you Jason! Not sure which way to go with this... :-/

Quote by @%username% on %date%

%body%