If this post is in the wrong area, let me know as it covers a bunch of the forum topics. Thanks for reading!
I started a business in the spring of 2010, after graduating with a finance degree with little to no seed money other than what I had saving which equaled < $5000. This business has growing slowly and steadily, however a cash infusion for working capital was needed to bring the business to the next level. The nature of the business is that a large amount of cash is needed in a very short period of time. I prefer not to discern the exact business.
I decided that I had two possible routes to take in order to grow the business to a level that I found desirable. Either take on partners or try to obtain a line of credit/loan.
I met a veteran in my industry, in sales who was working for a fledgling competitor of mine. After seeing our superior service and business model, he decided to try to join forces. I was hesitant at first, but he convinced me that he would be able to find investors to bring us to the next level. He brought on board an acquaintance, which had work history as a management consultant that had access to capital.
After negotiations, the business agreement between the three of us was a 45/27.5/27.5 split with me receiving the 45% majority. I had my reservations about this agreement, but thought that this was the best I could get to progress the business. I feel that they had the upper hand in negotiations as they acted as one entity, but in reality, they are two people doing separate work.
After raising $45,000 in November, $25,000 of which the third partner invested himself, we had working capital of $70,000, which included $25,000 from me. The $20,000 he obtained from an outside source required 15% interest on a 90 day loan. This was a steep price, but I went along with it as I was convinced that this investor would bring more money in the next cycle.
After this, I obtained a $25,000 loan backed by the SBA with a 10% annual rate and a 5 year term. This brings my total investment to $50,000 for the second cycle, which begins in April. The acquaintance managed to obtain $70,000 in private investment. However, I am not thrilled with the term as it is again 15% interest rate, principal and interest payable in 6 months. How far out of line are these loan terms with most early stage investors? Also, the $70,000 in investment he managed to bring in is much less than the $130,000 that we decided we needed.
The business had EBIT of 22.33% and gross margins of 39.51% for 2011. For the first half of 2012, with total investment of $145,000, we project EBIT to be 27.97% and gross profit to remain flat from 2011. With the business arrangement, I would receive compensation of $43,500 and my two collaborators would receive $29,000 each for the first half of 2012.
My concern is that I am not much better off with these partners, than I would be on my own as I have received the $25,000 bank loan. My profit if I went on my own would be approximately $30,000, which is significantly less than the $43,500 with the partners. But, my work load will be approximately 50% higher, which makes the extra profit unjustified.
Outside monetary investment, the partners bring the following:
Partner 1: Sales (but little else) experience in industry, hiring sales force for business, labor. Opportunity cost: gave up a $40,000 salary with previous company to work with us.
Partner 2: Finding investors from personal contacts, management and training of sales force, contributes to strategic vision of the operation (the future of the business, we are in a declining industry and having another person to discuss strategic position is important), labor. Opportunity cost: working less on his management consultant business.
My personal strengths lie in analytical skills, however I would be able to hire
and manage labor if I decided to venture out on my own. I designed and own all proprietary software necessary for the business. I also have the warehouse, equipment, and office space needed to run the business.
The labor that the collaborators bring is negligible as I would be able to hire people at a much lower rate to perform the work at a near comparable competency.
I feel that the partners are walking into a potentially very profitable operation without bringing a lot to the table. The business was fully functioning before the partnership and only needed capital investment that I was not able to obtain from my contacts or banks in order to expand greatly. I have a full business plan that I spent the better part of a year researching and creating. After some serious reflection, I feel that I am letting them have a free ride with the chance of them leaving me and becoming a competitor. They are learning a ton by being in business with me as they now have full access to my expertise in the field.
What is my play here? Do I try to go on my own, try to renegotiate the business agreement (a new contract is signed every six months and a new one will be agreed upon by the end of March,) or pressure partners to obtain more investment with better terms. All parties can walk away from the partnership at the end of each contract cycle. What do I use as leverage to renegotiate terms of the partnership?
I am leaning on staying with the partners if only for the fact that with the investment, sales more than triple and total profits are almost 3.5 times higher. This will make the business much more attractive to investors and banks. Another note, I cannot retain one partner without the other as they are very loyal to each other.