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I'm looking for a bit of small business startup advice. I've never been involved in owning or investing in a small business, so hardly know where to begin. This idea is really in the very early stages, so I'll be doing a lot of research, but I'm pretty sure there are folks here with experience that might lend some insight.A good friend of mine is a pretty good cook. BBQ is his love and he's pretty damned good at it in my and many other people's opinion. In the past he's worked and managed a couple of bar/grill type kitchens, but never owned his own. He's been working the past few years as a mortgage broker and right about now he's dead broke. I also work a full time job, with no plans to give it up. We've been tossing around the idea of doing a vending cart business in the downtown area selling BBQ. Start-up costs would be about $20-25k, of which I'd be the sole money guy. My buddy would do the cooking and would man the cart. There are a number of business considerations - we need a health-dept approved kitchen, so need to lease space/time in the kitchen of a local restaurant. Storage for food, for the cart. The business will operate full-time only 7-8 months of the year.
So here's my biggest question about this kind of partnership. Mostly it involves the disparity in our duties and investment.
I'll invest all the cash, and he'll do all the work. At best, I could handle the book-keeping, some errands and some purchasing. How do we split ownership, as well as profit & loss? I don't it expect to be profitable out of the gate, but what about two years down the road if we succeed? He's putting in 20-30 hours per week, and I'm doing almost no work at all. That's not necessarily fair to him. On the flip side, what if we decide to pull up stakes after a year - should he have 50% equity in any physical assets that we liquidate?
Thanks.
Follow Ups:
I really do appreciate all the replies.A lot of things to consider. I think I have a much better idea now of what would need to happen for a partnership to work between us, and some of the things that would be prudent to do. Lawyers and signed documents sound daunting (and expensive), but I just witnessed the results of another partnership gone bad. One guy stands to lose almost $250k and the other stands to lose the business he's built for nearly ten years. It can get ugly once things go bad, particularly when there are no written agreements.
Late yesterday I talked with someone at the city office about some of the requirements for operating a vending cart in the downtown area and it looks like all of the available spots have been accounted for. Apparently last year they had an open bidding proces for the sites, but all of last years license holders will be renewing for this year. That would leave us with only the ability to do special events downtown and various odds and ends elsewhere. I'm not sure that will make the invenstment worthwhile.
before you get all these other people involved, talk to your CPA.
First and foremost, a partnership is like a marriage, so spend the time and money to have an attorney put together the agreement which needs to cover how you'll decide to spend money, how you'll divide profits and how you'll handle liquidation or your partner's decision to quit or whatever. What happens if he dies? There's a lot to consider.I'd probably lean toward forming an LLC. Essentially, everything is negotiable, but you want to set up a plan that's simple, fair and creates the right incentives.
One idea that comes to mind is for you to loan the business the money for the cart and startup. This way you could get monthly payments of principal and interest and avoid taxes on the repayment of principal. Talk to an accountant. With this arrangement, then in the case of liquidation, you put into the agreement that your loan gets paid off first prior to any distribution to the partners. This would also resolve the 50-50 issue while providing some protection for you.
On salary, your friend is working, so he needs cash. But you don't want him to be too well compensated, he needs to be hungry. I'd consider a tiered system of sorts. Let him take the 1st $X which is a minimum amount, something like $10/hour or whatever you could pay any idiot to man the cart. The next $Y would then go you to repay the loan for the cart. The next $Z, if any, might then go to your friend or maybe that amount is determined on a percentage or commission type thing, whatever, the idea being to incent him to grow the business. After that, then divide the money 50-50.
However, before you spend any money, make absolutely sure that the city will allow you to do what you want to do. If possible, get your permits in place before you drop the cash. Also, check with restaurant suppliers and others as used equipment is plentiful and you can save 40-70%.
You said:
"He's been working the past few years as a mortgage broker and right about now he's dead broke."Many of my friends and neighbors share that occupation. While the demand for services has slowed a little from its unbelievable recent peak it is still a lucrative business and during that peak all the smart ones stashed the bounty away for a certain to come rainy day.
Think about the past financial performance of prespective partners as you would any investment. An indicator of potential performance.
Decide on how you want to structure the business. Sole proprietorship, partnership or corporation of some type. Use attorneys familiar with this here, not a buddy.Remember, if he gets tired of playing sidewalk vendor and walks away, he's out nothing except a friend. You're out that and whatever $$ you sunk into the business.
Look into insurance. Heaven forbid someone gets sick and sues. Whose name is on the papers? Also, some types of business' offer some dort of protection to the shareholders (corporations, S corporations, LLC, etc...) but you still need insurance.
And, last but not least, get EVERYTHING in writing.
For all practical purposes, you would be the money guy -- period -- and the other guy would be doing the cooking, selling, maintaining and grinning for the customers...you have already established that. I suggest that you contact your tax advisor on this, because it sounds to me like you should be the owner and your investment/involvement would be passive (which has tax advantages to you).In terms of compensation, you and your "partner" are free to work out whatever compensation arrangement you want. There are two ways you can do this. You can either handle the other guy as an employee and he can get regular paychecks with taxes withheld (which is a bunch of paperwork), OR if he will be free to choose his own hours, location and so on you can treat him like an independent contractor and just issue him a 1099. The latter can also be some paperwork, but nowhere near as much as quarterly payroll tax reports and so on. Again, I would suggest you consult a local professional just to be sure you are in compliance with state and local regulations.
I'm afraid I can be of no help at all in terms of leasing space and time in a kitchen, but I suspect you have "some" latitude there because this would be a BBQ operation. Here come those pesky local regulations again, because everywhere is different.
So what happens if you pull up stakes somewhere down the road? As a passive investor you would recognize any gain or loss on the disposition of the equipment. You would also be free to honor whatever compensation agreement you might make with the other guy in the event of business dissolution or sale.
So in my mind, from the safe confines of my chair here, your guy would not have 50% equity in the equipment. Doesn't sound fair? That is how capital works. The other guy is being given an opportunity to create income using resources put there by you.
think of this as a marriage. The two of you will be very close, and will be able to blame each other for many different failings. If the worst happens, God forbid, you will probably resent your partner for the remainder of your natural life. I know this from personal experience.Do this ONLY if you are very comfortable with the other person.
"If Stupidity got us into this mess, then why can't it get us out?"
- Will Rogers
...first - prepare proforma financial statements for 3 years. How long to recoup your investment? You'll be paying him a salary. What happens to profits?Second - consult a business attorney who has experience in structuring these kinds of deals. Mine has an MBA, works with entrepreneurs and is invaluable.
Seems like you have a lot more to lose, but without him cooking you have no business. So there needs to be incentives to keep him there.
Maybe after you get your money back, you split the profits 50-50, but the assets remain yours.
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