Forums: Discussions for entrepreneurs and small business.

Currently my business partner and I run a very small custom software development firm and have done so for last 5 years. We just about clear 6 figures a year just doing this on nights and weekends (although my partner is part-time with our business and puts in at least 20 hrs/week). We are both on payroll. We have a couple of key business that subcon work to us and have an extensive network of 1099 resources of all different skill sets that we use.   Our long term strategy is to grow the business to a point where we can be shareholder/owners only and hire managers and "doers" to run the business. Our limitation to grow right now is our free time and lack of key resources like sales people and other developers. We either need to hire or network more with other partners to increase our sales pipeline and deliver on back log of work (some of which we are already turning away). Our value is our expertise as 2 people, 2 unique software products we have built that have "legs" to sell but we havent had time to do so, 2-3 large marquee clients, and obviously our average annual revenue and retained earnings. 

One of our business partners that subcons work to us has approached us and has said that they have just landed a set of contracts that is going to quadruple their revenue. (they are larger than us at probably $1Mil-$5Mil revenue annually). They were so impressed with my skills and my partner's expertise that they have asked me to come in next week to talk about tighter parnterships so we have a stake in their business instead of just being a hourly rate sub-con. My partner and I have always felt that partnering with or merging with a slightly larger company with open resource capacity is a great way to grow. (The 1+1=3 concept). They really need our expetise as their current staff is alot of younger/newer developers and very little client-facing.

Assuming we are perfect complements to each other strategically in the market - what are some options for us (smaller company) to negotiate a stake in or be acquired by a larger company and what are some negotiation tips?

• Joint venture partnership - where we might share profits and how to negotiate that split?
• Merge with them or be acquired by them and if so
• How do my partner and I stay "owners" and not become their "employees"?
• How do we negotiate a stake in their equity? % owners vested over time? Guaranteed distributions on earnings?
• Do we have the right for them to "buy us out" to where they get a couple of our key marquee clients our software products and our expertise? How to I valuate our business?
• Would I expect that to get % ownership in their company, I have to "buy in" or do I get a certain % based on valuation of our business if we merge finances or can I expect them to "buy" our company at a multiple for us to merge?
• Other ideas? 

I think it all depends on what you want to do.  It sounds like you want to be owners, not employees.  So make that clear in the negotiations.  They may be willing to share profits with you without any help from you.  But, they also may want or need to keep as much money or have has much help to succeed in their business, so may be unwilling to do that.  Until you know what they are thinking, you don't know how likely it is that you will get what you want.  Finally, once you know what you want, ask yourself how much of that are you willing to give up in a negotiation?  Knowing that limit is crucial. 

As Per as knowledge and experience, Business partner is not a good solution because of chances of losses more.I am agree with thinking of Zonekarter.