Request for partnership advise

I have a restaurant concept and a prospective partner. I plan to use the
partner with an optional buy-out. What kind of terms are usually set for
the buy-out? That is, how do you decide on a figure before the business is
operational?

Thank you,


--
James Hendrix
hendrixj@surfsouth.com

By Panini (Panini) on Friday, May 12, 2000 - 03:14 pm: Edit

weigh out the pros and cons of partnership. I think you'll find that there a more cons than pros.It is my advice that you explore every option available before thinking partnership.
There are plenty of creative ways to get where you want to be without a partnership.
You can probably come to terms since you planing to dissolve the partnership anyway.
Just my 2 cents

By Dpconsu (Dpconsu) on Saturday, May 13, 2000 - 12:06 am: Edit

It seems to me to be ill advised to enter into a partnership while you plan to buy him/her out prior to even opening your "JOINT" venture. This sounds more like you are attempting to get a finacial backer rather than a partner. I would assume that your partner has or will enter into this agreement with you with the full intention of being a "PARTNER" and this question as it is posed, makes you seem to be a user and not a partner. Or have I miss-interpreted the meaning of your post entirely?

If you have a legaly binding partnership with an alloted capital share per partner, the details for the desolution of the parnership and the terms therein should be written within the covenants of the partnership. If you have agreed with your parner on the option to buy each other out and it is written into the agreement, the basic figures would be: the terms are cash and the amount within the first year of the partnership would be 2 and a half times the capital invested by the partner, and that this could be structured as a single or multiple payment as you agree to within your partnership agreement.

If you do not have an agreement in writing, "even though an oral agreement is legaly binding in some states" and if the partner can show that you had entered into the partnership solely for the reason to gain access to his/her funds with the intention to disolve the agreement he or she can sue you for every dime in future profits that would have been coming to him/her had you honoured your initial agreement.

Your posting of this question, could well be construed as a defacto addmission of the intent to enter into a agreement with the intent to defruad your partner of the expected benifits and return on his investment into your joint venture.

I would love to get feed back from others out there on your opinions as to what a contract or agreement really means to you.

By James Hendrix on Saturday, May 13, 2000 - 04:58 pm: Edit

I assumed that you should know from the information that we would have an understanding prior to opening that would allow for a future buy-out.

Without assuming anything else, I will say this: The equal investor/partner has plans to be a silent partner and understands that I will, in the future, have an option to buy-out his share for a prearranged price.

Although friendship should not be mentioned I still mention it because he is pushing me for my benefit to get this concept on the move. He is very well successful and intends on seeing me get moving on my career. He offered this to me and without you knowing the true extent of our relationship I am afraid that you may feel that I am being naive in my thinking that his motives are not monetary only. He desires no interaction in the business and does not desire to be an ongoing partner.

By James Hendrix on Saturday, May 13, 2000 - 05:01 pm: Edit

So, that being said, and going by your response, should I intend on returning his investment with an additional 150% or 250% return within the first year? I was not very clear on your statement.

I should mention that he will receive 50% of the profits until the buy-out is made.

I fear that you may perceive some sarcasm in my response. Please do not. It is hard sometimes to relay thoughts while typing without leaving a question of intent in the readers mind.

Very Truly Yours,

James Hendrix

By Dpconsu (Dpconsu) on Saturday, May 13, 2000 - 06:32 pm: Edit

James, your answers pose a few more questions,

A)When you say he will recieve 50% of the profits untill the buy-out is made, does this mean after you have structured the partnership to repay his initial investment?, therefore having no debt and then begining to pay 50% of the pre-taxable profits?, or(B) do you mean that you will pay him 50% of the monies left over, after all running expences including salaries? (and I hope some put aside for re-investment)right from the outset?

As for a buy-out within the first year, this provision is normally put into the partnership agreement in case you guys have a falling apart and each wants out of the partnership.( You would be suprized at how many partnerships fall apart during the capital-outlay period of construction and finish-out of the location). It would be normal to have agreed on a 150%-250% profit for his capital investment.( A normal return on Venture Capital). If the buy-out occurs after a couple of years or so, there would normaly be a downward sliding scale as to the agreed cost of the buy-out, (according to how much he has recieved above his original investment.)Or even to pay him a smaller percentage of the net recipts for a number of years. (I have a good friend here in Dallas that used investment backers and paid them out over 7,000% (yes! seven thousand)over the initial investment over the ten year period of that agreements term.) He made squat for ten years while his backers grew fat on his labor and expertise. He did'nt structure the agreement to be fair to both sides and has only made some real money for himself for the last four years.(This is a pit-fall to avoid if you can).

I do not percieve you to have been sarcastic James, but only a little unclear as to the original arrangement and the goals. You have now made yourself clearer and therefore I am able to answer you in a manner that I hope is understandable.

I do hope that you have a good lawyer who has prior experience in writing partnership agreements, as clarity will be appreciated later should the need arise.

Good luck in your endeavours

Mike

By James Hendrix on Saturday, May 13, 2000 - 07:27 pm: Edit

Thank you so much for your insight. I will take heed and hire a good lawyer when it comes time to draw-up the negotiated terms. I am certain that the plans will cover all anticipated potential partnership problems.

I like the idea of 150 to 250% return above the initial investment depending on the time of buy-out. It seems fair to me that he should reap a rewarding return. I will discuss this with him and am sure that we will easily come to terms.

I am not certain as to how we will plan to split the profits. I think that common sense would require that the initial investments be returned to the two of us immediately. Am I wrong in thinking this?

James

By Panini (Panini) on Saturday, May 13, 2000 - 07:29 pm: Edit

It's incredible to me that you could even talk 150 - 250% return the first year.If this is a friend that has you in his best interest, why not secured deposits for a line of credit?Hell, get a good business plan and go SBA, even though I don't recomend that.
Mike talks of Dallas, yes, there is alot of monies thrown at food service people to open businesses.They are gone usually within the first year.
James, you said that this partner would be silent and that your investments would be equal.Your investing equal parts money? 250% return, 50% of the profits untill the buy-out,James, think about it!Like Mike said, that buy-out is usually written into a partnership as an out if things go south.I feel like I'm intruding into your conversation, but I'm trying to understand the concept of this agreement.
Good Luck
panini

By James Hendrix on Sunday, May 14, 2000 - 02:48 pm: Edit

The concept is this:
I do not have the resources available to open this restaurant on my own. He is "loaded" and is interested in (1) helping me get started and (2) making a return on his investment. I would not allow him to simply loan me the money due to the fact that there is no fail-proof business that I can think of opening and I do not want to spend several years paying-off a squandered loan. Therefore, if he takes a risk and invests in me then he will either lose a small investment or he will gain a substantial reward. The idea to return his investment with the high percentages in order to gain the other half of the business seems logical to me. This is logical because either we will quickly lose or quickly win in our business. This particular concept will not find itself on middle ground.

James

By Panini (Panini) on Sunday, May 14, 2000 - 06:20 pm: Edit

Ok, I understand now. Good luck.
Although I was trying to figure out the partnership thing.Your first question was how much predetermined money it would take to buy out your partner. Make it whatever you want because there is no quick win in this business. Yes you may do greatin the beginning, but the tri9ck is sustaining. You won't find yourself on middle ground after the buy-out? Aw you don't have to respond.
Good luck in your venture.
panini

By kevin on Monday, May 15, 2000 - 12:17 am: Edit

If you are starting as equal partners and I assume equal stockholders you should consider the redemption value of his shares as a percentage of your gross sales. If your business does well he gets his return -if not -you could still redeem his shares at a lower penalty to you, hence you both assume some risk.

By Gerard (Gerard) on Monday, May 15, 2000 - 08:39 am: Edit

I'd advise a restricted stock - corporation, in the case of one wanting to get out the shares must be sold the partner, this prevents you from being STUCK with a potential hostile partner.
Forget the freinds stuff, thats now but contracts are for the future, he might die and you're stuck with the idiot in laws or whatever.
I'd agree with what someone else said previously, have them take back paper for a secured loan and line of credit, silent partner is a bit of an oxymoron. Even banks aren't that.
A lawyer who's versed in partnerships is a must.
I did it, it can be done, just cross all the t's and dot the i's.
All the percentages etc are negotiable, negotiate just about everything before going to the lawyer and tell the lawyer what you want.
Sub chapter S type corp is worth looking into, all the bene's of a corp without double taxation.

Cheers.

By James Hendrix on Monday, May 15, 2000 - 03:26 pm: Edit

Thank you all for your assistance. I am certain that we will come to terms easily.

James Hendrix