So my friend and I are talking about the possibility of joining up to do some consulting work in our area. What we're concerned about is how we split the profits. One of us is married, has a child, and is used to and dependent on a hefty salary. The other is single, and used to a much smaller salary. Obviously we're trying to work this out in a fair way and one that will allow our partnership to actually happen. Has anyone run across a similar situation?
The best way for a partnership to work longterm
is for you to buy him out. lol
If you want to keep him as a friend drop the whole thought right now.
Friendship and business does not go together.
What we're concerned about is how we split the profits. One of us is married, has a child, and is used to and dependent on a hefty salary. The other is single, and used to a much smaller salary.
Irrelevant from a business perspective.
Obviously we're trying to work this out in a fair way and one that will allow our partnership to actually happen. Has anyone run across a similar situation?
There are a ton of variables to be addressed here.
For example what kind of work are the both of you doing? If one is coding websites and the other is answering the phone then the split would be different than that between two people who have the same skill sets.
Will you put in the same amount of hours per week, what if he doesn't?
What if he decides he doesn't want to do this anymore? Then what happens to his share?
If you're going to go through with this, get an iron-clad contract/incorporation agreement signed because any sort of work hours/partnership deal is a nightmare.
If you keep this to a series of one-off deals then you might be ok, for contract X you will receive $Y to do Z (and his family situation is irrelevant to how much Y is). But a long-term partnership, just avoid it.
If you work with friends you have to have contract. I agree if you want to be friends better off doing work on your own most never last after you start business.
I also agree that this is irrelevant in a business situation. If they are demanding a hefty steady salary, then they are not ready to start their own business. The money should be split based on the amount of work you will do, not what your personal needs are.
you could just generate monthly, quarterly, etc financial statements and divide income from the profits.
Contracts are definitely needed, and probably even more so in your case since he is a friend.
First, I'd like to disagree with those who say business and friendships are a bad mix. Going into business with a friend (spouse, family member, etc) can create a very strong business which is able to weather hard times. Ever heard of Hewlett Packard? Harley Davidson? Electronic Theatre Controls (ETC)? Some of the biggest names in business started out as a couple friends in a garage.
The key is to not let the business replace the friendship. And don't assume that friendship is a replacement for good business practices.
Before you get involved in the actual business, sit down and talk about who will be doing what. Lay out clear guidelines as to who's responsible for what aspects of the business, and what to do when the balance tips significantly.
If there are only two of you in the partnership, decide who's in charge. Then give the other one 51% of the company. It's a balance of power.
Split the profits (and debt) equally. If workloads become unbalanced, shift responsibilities to make them balance out.
Before you do anything else, write up a document stating what to do in case of conflict. What to do if one partner wants out. What to do if one partner is acting in a manner detrimental to the company. Make sure that you both agree to it and that any spouses agree to it.
When conflicts arise (and they will), remember that this person is your friend.
3 years ago, I started a company with 2 friends. On the first of this year one of them left the company to spend more time with his family. We're all still friends—despite several major conflicts, including a coup d'etat where I took over the Presidency. The best thing we ever did was to write out the "buyout" rules before we started.
I usually believe in splitting the profits, but much depends on how things are arranged, especially with regard to expenses. For example, you may be splitting revenue, but have different expenses, as well as different time commitments. Sometimes looking at expenses and time commitments can help keep things equal.
Expenses shouldn't be an issue. The company should pay any expenses (or reimburse for them). Profits are what's left over after all the expenses have been paid. It doesn't matter if you're talking about a box of paperclips or a capital contribution.
I would take a look at what each partner is bringing into the company. If the one who is coming from the corporate world is bringing a substantial client list and credibility based on their name, then they may be worth more to the company. However the junior (I presume younger) partner is the one with the talent and skills then this one may be worth more. 50/50 only works as long as the work load and responsibility is well distributed.
As for working with friends, as was stated, "as long as friendship is not a substitute for good business practices" is the best tip here.
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