Long story short, the business I’ve been managing for past several years for an absentee owner has fallen into a hole of debt from another industry related endeavor the owner had tried to get into and failed. It’s left me in the position of needing to find a new career path
One of my long time customers offered to invest with me to start my own business in hopes we can maintain some of the previous customer base.
I have all the tools and knowledge to get the jobs sold and finished but need about $25k to fully start off in the manner I would like so I can maintain the same professionalism my customers have become accustomed to. I project to gross around $200k in the first year with a 65% gross profit.
My investor has offered the loan at no interest, want 35% equity as a yearly distribution, hands off with the business. He also brings to the table a much more powerful sense of business than I myself possess, a rolling line of interest free credit, and bookkeeping/admin/marketing help. Our goal is to grow the business in a scale that will require amounts in the 6 digits in the future and our deal is to restructure our percentages at that time as profits grow. But loans remain interest free.
I feel like 35% is nothing with the resources I’ll have available to me as a new business owner. But also recognize the power that removes from myself going forward so I’m looking for others thoughts?
35 percent ownership of year one gross profit 65 percent equals stakeholder ROI 82 percent. And this is in perpetuity?
Agree. Why do this?
“I project to gross around $200k in the first year with a 65% gross profit.”
Stress test - gross sales 130K
(NOI $84.5K / 12 months) / 1.5 = $4,700
This is maximum allowable monthly payment business could support considering economic crisis (i.e. 33 percent decline in sales revenue) and make financial sense.
So, I’d pay usury rates on $25k loan before I’d give up 35 percent ownership.
There are a lot of other details we don’t have that would make it easier to understand but I’d say overall, it doesn’t sound like a terrible deal. I would get very clear on some definitions though:
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Outline much deeper what that 35% distribuiton is going to entail. In the first year, you may need to make investments and want to have cash on hand in the bank so if he expects a fully realized dividend based on an accrual profit margin, but your business isn’t in a position to spport that, you just want to have a better understanding of what your potential exposure could be.
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Define clearly what “bookkeeping/admin/marketing help” actually means. Does that mean he is going to assist with that when he can? Provide someone full-time? Allocate resources for it, etc? Understanding what that means will be crucial as those support roles are critical and if not done correctly, will distract you from what needs to be done.
Overall, sounds pretty fair but definitely get into the details on that stuff so you both understand and get a very solid operating agreement.
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My concern would be any retaliation / litigation from current absentee owner.
If this is your first business, you hv made a good deal. What is the loan guaranteed against? Are you putting personal assets on the line?
This is my first business, and zero collateral on the line.
then go for it. If you can negotiate it down to 30%, or revenue based royalty, that would be great but don’t sweat it. Focus on getting to $200K. My gut feel is that you will end at 40k instead of 200k. What happens if that happens? Will the investor continue to support?
I would exhaust all other lending possibilities first.
Sounds to me like all he’s going to do is give you $25k, you’ll do 100% of the work and he gets 35% of business and if you do well, he’ll take more equity.
If you’re expecting $200k of revenue, his $25k = 12.5% of revenue.
If you measure against GP of $130k his $25k is 19% of GP.
35% is way too much.
If your projection is accurate, he’ll make 82% on his $25k in the first year.
You can get a better deal than 82% annually using a loan shark.
Imo, 35%
How much equity do you expect him to grab in the future?
How will that be determined?
Projections are never accurate. Op is starting his first business. I would be surprised if the projections are even 50% accurate.
But what is the net profit? That is what he will be getting 35% of. If expenses equal $100k he is only getting $10k payback.
Join a credit union and take a loan out. Then use that 35% to pay out the loan.
You need a written agreement, and it needs to be reviewed by your attorney not his attorney.
And you need to decide the legal form of ownership I suggest an LLC with a strong operating agreement that include clauses of how to liquidate the business.
Again you need attorney help with this
Well you could get a loan of 25k and pay it off within a year if your profit margin is so high. Let’s say the services he offers is worth another 25k. He is valuing your company at around 143k. Is that fair assessment for you? If not then get a loan
Do it with an option to buy back his 35% interest for $100,000 at any point in the future. That gives him a huge return. An agreement to renegotiate is not even legally enforceable. You can’t agree to agree.
Sounds like a good idea, but how did you come up with $100,000?
You grow the business to a level where a bank will happily give you a line of credit. It’s not difficult.
You will become bitter after the business is booming, and he was there to invest the trivial amount of money for a lifetime of you working. Been there.
His 25k is an interest-free loan. So you’re giving him 35% equity for the amount of money you’re saving on interest (plus whatever his advice is worth to you).
You could get a personal loan from Discover right now for up to $40k. Interest rate depends on your credit score, but let’s say 19.9%.
If borrow $25k and repay that over 48 months, your total interest paid is $11,500.
If you believe in yourself, the numbers make sense to get a personal loan.
Or negotiate that the 25k isn’t a loan - it’s an equity investment. He’s putting in money and you’re putting in effort. Then the 35% equity might make sense, especially if he’s also an advisor.
You did what you gotta do, is say you were pretty lucky
Also its a loan so he isn’t really putting money in. If he is investing $25k as part of his partnership then maybe. He puts the money in, you do swear equity. He is loaning money and taking 35% net profit. For how long?
Sweat equity is important to consider here as well. If things turn south in the agreement and it isn’t outlined in writing everything you’re putting in, he will hold the control as he holds the money.
For that low amount of money you’re better off getting a loan without giving up equity