Has it happened to you that a society is proposed to you under these conditions: "you provide the knowledge and I provide the money"? Or maybe I put the capital and you put the work… and we go to 50% each?
This type of partnership is very common, they seem just relationships. In these articles you will see that 50% to 50% is not always a fair relationship and that there is "a lot of fabric to cut" when one partner invests the money and another contributes the knowledge or their personal work.
Many people have done business under some of the following circumstances:
• A partner has the knowledge or idea of a great product, but does NOT have the capital to invest, so they find a friend or an investor to put the money in and they decide to "go 50%".
• Someone else has a business going on, knows they need capital to take advantage of new market opportunities, but they have no capital, and they also have no guarantees to offer as collateral in a bank to obtain financing. So an acquaintance brings in the capital, and this entrepreneur offers a portion of the shares in return.
• A couple, boyfriends or married, decide to start a new business, so that the correct thing is to distribute the shares between the two at 50% for each.
• The parents have been in the business for years and now they want to divide the company between their two children, one of them works for the company, the other does not. But the shares are distributed 50%.
• Two brothers start a new company. You have your high paying job in a bank, you have gone to college and you have some savings. The other is an empiricist, a hard worker, he also has some savings; but he knows that he has serious deficiencies in the administrative part. The two of them talk and decide to take the business to 50%.
These are just a few of the circumstances that lead two people to start a 50% business, "half" as they say in some Latin countries.
As the years go by, these two partners who started with high expectations, see that the situation is different now and one of them feels that they are at a disadvantage.
The situations can be just as serious and the consequences as well, whether the company is having financial success or not. If there are profits, the problem arises of what is the fair way to distribute them. If there are losses, the situation is also very serious, especially when one of the partners carries the burden of the work and another has placed real guarantees on credit with the banks. What would happen if the company fails?
In the 30 Errors Conference I spoke about three of those 30 Errors being mortal sins and that one of the mortal sins is: "choosing a bad business partner."
In reality, we do not always choose bad business partners, what we choose is bad for our business partners or perhaps by not discussing some of the critical issues, circumstances will arise so that "the bad side" that we all have arises in the relationship.
I also tell the story of that hard-working and enthusiastic entrepreneur looking for an investment partner to set up a "children's swimming school." He needs sixty thousand dollars, which he doesn't have. He has a clear business idea, he has negotiated the long-term rental contract; but he is young, he has no bank credit and no guarantees to offer. Your friend offers you the money; But he asked him for 50% of the shares and something else… He asked him to take full charge of the construction, business administration and operation in exchange for a salary of a thousand dollars a month.
After about three years, his partner appears one Friday every month to collect the money "invested" and his earnings, he arrives radiant in his BMW of the year, with his glasses on his hair, he greets his partner who is in the pool giving classes. to a group of children. About thirty minutes later he takes his check, says goodbye, and leaves. The other remains in the pool thinking that "that relationship" is no longer fair. He thinks he works harder, pushes himself harder, arrives at five in the morning every day, goes home at nine at night and only takes one day off a week to rest. He's still making $ 1,000 a week, but he's also getting his earnings check the same day his beaming partner arrives.
I will have to prepare a conference on this subject, because it is extensive and has many edges. But in this short article I want to make you reflect on several aspects that you should take into account when you are faced with the situation of a 50% society where one puts the money and the other puts the work or knowledge.
Aspects to take into account:
1. The first thing is that you forget this myth: "50% societies are the fairest." The myth is NOT true.
2. Fair companies are companies where contributions are valued at the market price, in the best of cases or at a “fair” price, and the shares are distributed according to the value of those individual contributions.
3. Before investing in a new business, you must be clear about the Cash Flow that that business will have over time. The usual are twelve-month projections. Ideally, five-year projections. In this flow you project the estimated income and cash expenses to obtain the monthly net cash flow, which will determine your capital needs and the recovery of the money invested.
4. Before investing and starting a new business, you must be clear about the initial investment capital: facilities, machinery, equipment, inventories and working capital. The capital includes the money needs to cover the credit to the clients, the payroll of the workers and the expenses of the first months until the company reaches the breakeven point.
5. The partner who puts the capital or money for the first purchases must be clear that this money is no longer his, it becomes the property of the company. You should not expect it to be paid back, as a loan would. Profits will be paid to this partner when the company begins to produce them.
6. The partner who contributes a business idea, but does not contribute work or money, must negotiate with his partners in value of that business idea, that knowledge and that product. You should not expect to receive a monthly payment for that knowledge in return. He will receive profits when the company begins to generate them.
7. The partner who contributes work can NOT expect to receive a salary according to the profession, the privileged position of partner or his personal family budget. Nor can you expect a salary for being "the eyes of the owner in the company." The partner who works must expect a salary in accordance with the position he or she properly performs in the company. The best way to estimate that salary is to know what would be the salary that would be paid to a capable and competent person in the market to fill that position. The working partner must meet the schedule and performance standards of any other worker.
8. How does the working partner pay for the shares? Generally, the working partner has little or no money to invest. You can pay for the amount of shares you want to purchase in two ways:
to. Leaving a part of his salary, each month as payment for those actions.
b. Not withdrawing profits when they start to turn, until paying the value of the shares.
The correct way to establish the percentage of shares in a new company is achieved in this order:
Step 1
Calculate the initial investment capital that will be necessary to set up the company: facilities, machinery, equipment, permits, legal expenses, organizational expenses, brands, designs, etc.
Step 2
Establish a value for the business idea or product that one of the partners will be contributing to the company. This assessment is an activity that should be carried out by an expert; but partners can do so by estimating potential sales or profits. Valuing this contribution is as important as estimating the initial investment.
Step 3
Define the position of the partner who will provide work. Define the obligations and responsibilities of that position, just as if you were hiring an individual. Then establish the salary that partner will earn while working for the company.
Step 4
Prepare the Cash Flow projected for 12 months or, better yet, 5 years. In this they show the income and expenses that are estimated for the company. I always suggest at least two scenarios: one optimistic and one more conservative.
Step 5
Define and write an agreement on how the profits will be distributed when the company begins to generate it. How the profits will be distributed and how often it should be done before starting.
Step 6
Define an initial share capital and the number of shares or quotas that will represent it. An example: one hundred thousand dollars is the share capital and it will be represented by 100 shares of 1,000 dollars each month. Take into account that not always all the initial capital contribution will be contributed as social capital. The partners could agree that a part of that contribution will be returned to the partners. We will talk about this in another article.
Step 7
Then they must add up the contributions that each partner will be making to the company: cash contributed, intellectual property (ideas or products) or work in kind (the salary that the working partner will not withdraw). These items are added together and the percentage is calculated. It often happens that the partner who invests capital is “favored” with a higher percentage and than the one who works with less, because he cannot leave a very high sum of his salary. At this point conflicts begin to emerge; but it is better now than not later, when the company has been running for many years.
The percentage of those who have less contribution can be improved, agreeing to return a part of their money to the partner who invests capital, recognizing an interest rate as if it were a loan. It can also be improved by generating an account receivable from the partners, who will then pay in the manner agreed: either with a monthly payment or through profit retention.
I recommend again what I recommended in the article: "4 hot topics to talk to your business partner":
“Prepare a document or act where all these agreements are in writing. The more detailed the better. Everyone signs the document and everyone keeps a copy. A part of these agreements will then form part of the constitution of the company; but the original document will be like the statute of the company "
In a future installment I will offer an example of what this whole process could be. Pay attention to this which is delicate, talk to your partners about it, whether they are just starting out or have been at it for years. It is best to discuss it now before conflicts arise.
