Forums: Discussions for entrepreneurs and small business.

Hello, I currently have someone interested in being a silent partner. I already have a successful business and am looking to expand to another location. The person I lease the real estate from has said that he would be willing to be a partner and build a 2nd location.

I honestly have never thought about a partner but given that the building would probably cost close to $1.5 million to build I have to at least consider it since I do not have that kind of cash BUT before we even discuss it I would like to know what I should expect and waht is fair for both parties.

I know this business well and I know based off of current demand exactly what this business will generate. That number is $300k in profit annually. That includes all overhead EXCEPT the building. I have other parties who have shown great interest in doing a "Build to Suit" and I know that my lease payment with them would be close to $8,000/mo. and that includes everything (taxes etc.).

In both scenarios I am not actually laying out any cash for the property. So if I were to just lease the property from someone else for $96k anually that would leave me with just over $200k in pure profit.

HOWEVER the property owner of my current location has plenty of money and has already spoke of adding a 3rd, 4th, 5th etc. location if we were to "partner" up. Basically he can get me all the money I need as soon as I need it and basically make things happen much faster.

He would be a silent partner in the background and I would run all of the day to day operations. So what would be fair? His first thought was that I get the place rent free and we split the profits 50/50. That doesn't make sense for me. Under that scenario my profit would be $150k annually and I have to deal with him as a partner versus me just leasing a place and making a profit of $200k and have 100% ownership. I would not be owning any real estate in either of these scenarios. That is why I feel I obviosuly need to make this a lot better for me...and I think he realizes that. It was only his first offer. SO FINALLY THE BIG QUESTION: What should I counter with? What is fair for both parties? Would I be out of line to ask for half ownership of the property (like by paying him half of the value over a period of time...of course he would have to finance me and I would make payments to him with interest)?

Any help, advice or ideas would be GREATLY appriciated!

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cti531,

I don't see the "partnership" in your description. As I read it, he owns the real estate and is doing a build to suit for a percentage of the profits instead of a fixed lease payment.

As such, he would not have an "ownership' position in your business and you would not have any in the real estate.

So what (if any) is it worth to you to have a "variable" lease payment?

If you want to have him build more locations, then you might want to consider a "deal" which gives him a better payout than what a straight lease would do. Perhaps a sliding scale with a cap?

Hope this helps. If you want to discuss your specific situation, feel free to drop me a PM or email me directly.

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Thanks Robert. He was the one who actually used the word partner. I know he has other successfull businesses and my assumption was that he saw a good thing here and wanted a piece of the action.

The more I look at it though it just doesn't make sense. Neither scenarios I mentioned will give me any ownership of the property, so I guess that I am better off going with the other person on a straight build to suit and keep the larger amount of profit. I just thought if anyone had some ideas on a fair partnership agreement I would have liked to have heard them. The only advanatage by going with him is that things would happen quicker and more locations could be built much sooner.

cti,

If you want to expand quickly, having a relationship with someone who can make the "real estate' available to you could be a big asset. Since he will keep 100% ownership of the Real Estate - I don't think it would be in your best interest to exchange ownership of your business with him

Keep in mind, however, that a "profit (or revenue) sharing agreement doesn't have to include any ownership transfer.  Since you intend to have multiple locations, this approach would allow each one to "stand on it's own".

Feel free to contact me directly if you want to delve into the details.

 

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

When you look at a partnership or any kind of business arrangement, it is all about the value the other person brings to the table. 

The arrangement you mentioned is common when someone needs an influx of cash to facilitate their expansion.  Have you retained enough of your profit to pay for your equipment and inventory at the new locations?  Do you have any need for the additional cash flow you would have by not paying rent?  In my experience, this is the benefit of the arrangement he proposed.  If you don't need these things, his proposal might be great for the other businesses he works with but it has no real value to you.

You should also give a lot of thought to what you are giving away.  While your profits are $300k now, will they increase exponentially with each new location?  There are hard questions to ask the investor that will give you a feel for his expectations.  What happens if things crash and there are no profits, or if you have to put a lot of money into your business?  Will you be able to stay for 2-3 years without paying anything?  You always have to plan for all possibilities.

As successful as you are now, I am sure it is redundant for me to say make sure you have your own attorney carefully review your contract and make sure you've covered everything, but I'll say it anyway. (and btw, congratulations on that!)

When reading your posts, I get the feeling your gut is telling you this arrangement is not of value to you.  Go with your instinct.  This person may be a very successful businessman and have great value to someone in a different situation, but you know your business and your needs better than anyone. 

If it doesn't bring a real value to you, it isn't a good deal.

Good luck in your decision.

Lenore

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