A buddy of mine has owned a seafood market (focusing mostly on ready to eat/ready to cook meals for pick up). We have decided to open a similar concept in my town, about 80 miles away. We will be 50/50 partners for the first 5 years then I have the option to buy him out. But he wants a royalty ongoing for use of his recipes, which I am fine with.
What is a good way to structure this? If we go off of gross I was thinking 2%. If we go off of net I was thinking 10%. Both of these in my projections are about $20,000 annually.
He is investing $50k at startup.
He will not be providing any support ongoing once I buy him out. I think part of the value for these types of fees is because you get the use of the name (not relevant here) or ongoing marketing support (also not relevant here).
Any advice on how to move forward? We are good friends and all is very positive. I just want to have some ideas that will be fair to both of us.
Thanks!
What is the total estimated start up cost? Trying to understand why you would be 50/50 partners for the first five years. My hunch is that the cost will be well north of $100k, and it sounds like he won’t be providing any ongoing operations support due the distance and your description. The royalty will cover the recipes and concept, so I’m not sure I see the business sense in the 50/50 split.
Royalties should always be gross, as you control the bottom end and the franchisor has zero control over it. 2% is crazy low for franchise royalties but if it’s a small franchise and they’re new to the idea then maybe it’s a win for you! But it should definitely be off the top.
I also don’t see the point of the partnership for the first 5 years. I’d structure it as a loan with the royalty starting once he’s paid back, and he provides that support you’ve mentioned. A partnership puts your stake at risk, as if he’s not happy with how you’re handling things he can force you out and take over. That, to me, is not a business but a job.