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Business Investment - Splitting the profits

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Avino
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Business Investment - Splitting the profits  Reply with quote  

Hi all,

I am investing in a business with another partner. The question I have isn't
about the business in of it itself (we have been planning and doing research
for almost two years now and are ready to move ahead with the capital
investment).

We are to the point in our planning were we need to discuss how the money is going to be split once a profit is made. So here is the situation and I need some advice (and forgetting the business and going into the stock market is not an option).

There are three of us. Two of us are going in 50% and 50% with the capital
needed. The third will be doing all of the work at least during the beggining. Since the third person will be strictly dedicated to doing the work we will be paying him a salary each month to compensate for his efforts.

Lets assume the business is successful and it now comes time to split profits. One scenario is that we meet our lowest expectation and the other
our highest. The business is in the Dominican Republic so for figures below
I converted the numbers to dollars and assumed the turn around time to a
profit was 6 months. The salary is a constant $3,450 over the six months in both scenarios.

The initial investment is $25,000, so $12.5K each with the capital.

scenario 1 Lowest profit met
Profit : 9,572 - If we split this evenly amongst the three of us, then the one that didn't put in any capital but put in all the work makes out with 6,608 and the other two make out with only $3,158

scenario 2 highest profit met
Profit : 68,715 - if we split this evenly, to be honest I wouldn't even care much about the 3,450 more the other person gets above us because its a very good profit margin.

Of course if the business fails we loose our capital and the third person has at least gotten a monthly salary out of the deal while the business was started.

So my question, what is a fair formula to split ownership / profit sharing of the business if its successful? After writing this down I think some kind of gradual formula may work best. Any ideas?

~A.

Also blogging @ avinos2cents.blogspot.com
Post Fri Sep 18, 2009 8:41 pm
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coaster
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Cash: $ 1626.30

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Location: Wisconsin
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You are compensating the person doing the work, so he has no equity in the business and doesn't share in any of the profits. Of course, he doesn't share in any losses either, since he has no money at risk. The owners of the company are the two who put up the capital, and they own it 50% apiece. The share the profits 50% apiece and they share the losses 50% apiece. If the third individual wishes to share in the profits, then he has to put his money at risk (and share in the losses) by providing some of the capital.

That's the black and white of it. You may, of course, do whatever you want. Perhaps you can reward the compensated individual with an equity share if it's profitable. This would be an incentive for working for the success of the business. Or perhaps you can just offer him a percent of the profit as a bonus. Third option would be to make part of the compensation an equity share in the business, in lieu of a higher salary, and then he shares in the profits pro rata his equity interest.

~Tim~
Post Sat Sep 19, 2009 12:55 am
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Avino
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Cash: $ 24.80

Posts: 117
Joined: 27 Mar 2006

 Reply with quote  

Hi Coaster,

Great to hear from you. I will be taking up flying again in a few weeks to finish my license. I had to put it on hold for a while to get other things off the ground (pun intended lol).

Thanks for the reply, it is pretty much my feelings with the subject. I think we are going to go with a gradual scale of profits to equity. The more profits we make, the more equity he will earn in the business and the initial salary is somewhat low so there is much incentive for the business to do well.

And your right, if it fails, we take all the losses, and he still gets a salary. I am glad to say I finally got debt free 100% just a few weeks ago and it feels great. Now I can focus on business and investments.

~A.

Also blogging @ avinos2cents.blogspot.com
Post Mon Sep 21, 2009 2:13 pm
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coaster
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Cash: $ 1626.30

Posts: 7990
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Location: Wisconsin
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Best wishes and hope for success in business ....

... and on the check ride!!

My only advice is: don't do anything you wouldn't really do if you were PIC without the examiner sitting beside you. What student pilots don't often take into account, or even realize, is that on that check ride, they really are PIC. Don't be afraid to admit ignorance; just don't commit to any course of action based on trying to concel that ignorance. "Press on anyway....." You wouldn't really do that if you were PIC with loved ones in the other seats. But some do ..... JFK Jr did ....

Post your checkride on your blog; I'll be watching for it!! Very Happy

~Tim~
Post Mon Sep 21, 2009 5:54 pm
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