OT: Becoming a partner in a business
- Thread starter theRU
- Start date
Yes, I've been through this.
If you are sinking considerable resources into this, you might want to see a lawyer.
- Get the books, review them carefully.
- Review the partnership agreement carefully, make sure to understand it.
- Review any leases.
- Require disclosure of any and all business debts.
- Do not agree to sign any personal guaranties for leases, business lines of credit or individual partner lines.
- You might even want to look into your future partner's individual financial situation. If he is a mess financially, then you do not want to be his life preserver.
- Have a judgment search done on the business and the individual partner(s).
- Have a pending litigation search done on the business and individual partner(s).
- Will you need to make a capital contribution? How much? What percentage of the company are you getting? What are your management rights? When are profits/losses distributed?
If you are sinking considerable resources into this, you might want to see a lawyer.
Is this a new venture or existing? The process can be considerably different, specifically around the operating agreement for starters. More specifically, you would be co creating this in a new venture. If you are becoming a partner in an existing company, you will be signing what has already been created. In either case, you will most certainly want to have an attorney involved. I have been on both sides, and if you are becoming a partner of an existing firm/agency/co., you will obviously want to be very understanding of what you are signing. Unless you know contract law, go see an attorney. What state are you in and what industry? The state matters as it relates to items that will most certainly be part of the OE like non competes. Some states they are highly enforceable, like NJ from my understanding. In California, they are almost not enforceable. It would be good to know for you in case things go sideways.
Follow Kings advice. And find a trusted contract attorney.
Follow Kings advice. And find a trusted contract attorney.
Is the business a corporation, or an LLC? If not, be careful. There could potentially be personal liability issus if things go bad. Do not rush in. If you do go forward with it, watch what you sign on behalf of the company/partnership. I got screwed over by a "friend/partner" twenty years ago.
As others above said, get a good accountant/financial advisor, and a quilified attorney. Follow their advice. Don't skimp on your professional guidance. You might save a few bucks short term, but there is a good chance it will cost you more down the road.
As others above said, get a good accountant/financial advisor, and a quilified attorney. Follow their advice. Don't skimp on your professional guidance. You might save a few bucks short term, but there is a good chance it will cost you more down the road.
Thanks for the feedback. This is an existing company based in CA that is in food manufacturing. Aside from contacting an attorney which i plan to do, i was more worried about not knowing what to ask for. I used to work for this company and know that it is very well run and highly profitable from within. I decided to leave when the i felt that the juice wasn't worth the squeeze for me. Now that i've been away for almost 2 years, the owner(company is incorporated, however it appears to be wholly owned by 1 individual) of the business is trying like hell to get me back. I've always been a senior manager, but he wants to bring me in on an executive level so to speak and i dont even know what to look for. I want equity in the business if i'm going to be working there again, but i dont know what structures are available. I'm willing to buy in to a certain extent, but i'm also curious how things could be structured if i were to earn equity.
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thanks for the feedback. I dont have all the answers but i'll be sure to look into them. Def getting an attorney involved. I mentioned it above but i was more interested in learning what i should be asking for. I have a certain amount of leverage in that the business wants to bring me back in a higher capacity. I'm used to negotiating salary and benefits, but i've never broached executive level compensation. In addition to asking for equity what else should i be looking for?
A partner is only a good thing in three instances....
You cannot get Capital without him
He does things you cannot or can't hire someone to do cheaper
He's your FIL and you married into the company.
Outside of that its craziness. Also, although this sounds morbid it's not just a partner. It's his partner as well. He gets divorced and now there are 3 partners. Or an audit.......pick. Lol
You cannot get Capital without him
He does things you cannot or can't hire someone to do cheaper
He's your FIL and you married into the company.
Outside of that its craziness. Also, although this sounds morbid it's not just a partner. It's his partner as well. He gets divorced and now there are 3 partners. Or an audit.......pick. Lol
Went through something sort of similar with my last company, before starting my own. I would strongly consider asking for profit sharing and equity. Of course, that could be structured in a myriad of ways. More than happy to jump on a call if you want to hear about my experience. I also have a contract attorney hat I have used in Pasadena whom I trust if you want one. She isn't super inexpensive, but not super pricey either. Definitely want to engage one though. I can't stress that strongly enough.
Being candid, your initial question (in light of what you are trying to achieve) was off the mark and reflects that you might be looking at it wrong.
You don't need to get a lawyer involved now. You need to very respectfully ask the owner "is there any way to get equity participation"? If there is, he'll have the mechanism to make that happen and you can get a lawyer. I would not presume that there is significant equity available. Typically, people have a tendency to think that the opportunities for equity (even in a smaller company) are greater than they are. Regardless, if there is an opportunity (through direct equity, options, phantom stock, etc.) don't look at "what % of the business is this"? Look at "what is the potential value of this and how does the total comp package compare to my alternatives". Always remember that when you ask for equity, you are asking the owner to part with something he owns - and it is solely his prerogative to part with it or not. Just as it is your prerogative to take the job or not.
I have to agree with Scarlet. You do not know what his intentions are for partnership. He may want you as partner in name only. I have been approached multiple times over my career to enter partnerships. Let me tell you that most peoples definition of partnership and equity sharing are vastly different. Find out the owners definition, motivation and strategy for transition to partnership. I have had 2 partnerships in business and they have been structured differently.
I agree with Cali as well. You need to find a lawyer that understands contracts and your intentions but this may be wasted money before having the conversation with the owner.
Also understand that if there are triggers, and there probably will be, to earn more/any equity, he knows infinitely more how likely attainable those triggers are than you at the going in point.
I knew someone that walked into an equity position with a great small business leaving behind a very profitably small business (2 people 1 million in revenue per year). The deal was structured with a base level of equity and higher levels based upon growth over the next three years. The housing bubble hit and immediately made it impossible for him to every hit even one target to get higher levels of equity. He then got to sell the phantom stock back at a significant loss with the price dictated by the CEO himself - the only one he could sell to.
I knew someone that walked into an equity position with a great small business leaving behind a very profitably small business (2 people 1 million in revenue per year). The deal was structured with a base level of equity and higher levels based upon growth over the next three years. The housing bubble hit and immediately made it impossible for him to every hit even one target to get higher levels of equity. He then got to sell the phantom stock back at a significant loss with the price dictated by the CEO himself - the only one he could sell to.
Hire a lawyer and an accountant would be one of my first steps in due diligence. If you go through with it, I would advise you to purchase some "key-man" life insurance on the partner. At least enough to protect your monetary investment. And if you will own any of the business, look at funding a buy sell agreement that the lawyers and accountant assist you with.
Also, partners don't have withholding or a W-2. You will need to start making estimated tax payments. They also pay self-employment tax on their 1040 (the self-employed equivalent of FICA and medicare) so be prepared for a larger tax liability when you file.
What type of business entity are we talking about? You are getting some good information in this thread, but some of it pertains more to partnerships than corporations. Assuming it is a corporation since you mentioned it is incorporated in California, your equity comp possibilities will depend on, among other things, how the company's equity is structured, how the company is taxed (s-corp vs c-corp), whether it has any incentive plans in place, etc. Depending on the form of equity, there will also likely be tax implications from any equity grants. As others have mentioned, do your due diligence and consult an attorney and/or accountant as necessary. At a minimum, I would run a search on the website for California's Secretary of State to confirm that the company's registration is active and then order a status report to ensure it is in good standing.
I would go back on a senior level with a one year employment contract and the intention to become a partner after that.. This gives you time to find out the real story. If they need you, this makes sense. If they need your money, then you definitely need to go this route. Good luck. $$$$
Had the first conversation with him already. He was going back to his attorney to figure out what options exist to accomplish what i'm asking for. He acknowledge that since its not a publicly traded company things can be more complex than getting stock options/ earning stock in a publicly traded company.
I totally understand that he needs to give a peace away of his "baby" and i'm not expecting to get a large piece at all. I just want something that is mine. If i'm going to be working my ass off to help the business grow, i want to be vested in the success.
Accountants are useless in evaluating small business equity positions.
The attorney can do what King suggested above.
If you get the appropriate warm and fuzzies over those answers, you want a business valuation expert to determine the true economic value of the company, benchmark that value against recent market multiples for privately held firms, calculate any premiums or discounts for control and/or marketability and ultimately calculate what portion of equity you are buying is worth.
If you ask your CPA to do any of the above, they'll think you're hallucinating and check your forehead for a fever.
I know a guy...
The attorney can do what King suggested above.
If you get the appropriate warm and fuzzies over those answers, you want a business valuation expert to determine the true economic value of the company, benchmark that value against recent market multiples for privately held firms, calculate any premiums or discounts for control and/or marketability and ultimately calculate what portion of equity you are buying is worth.
If you ask your CPA to do any of the above, they'll think you're hallucinating and check your forehead for a fever.
I know a guy...
I have often thought about opening a branch Bass Pro Shop in my area. There aren't any good sporting good stores like that in my area, perhaps Effingers but they are very expensive. I never did it I figured I would lose my shirt.
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