I founded a business about a year ago, and recently decided to take it in a new direction. Same name and premise, yet slightly different business model. I founded the company as a sole proprietorship and have roughtly $4000 invested into it. I recruited one of my good friends who has expertise in the industry of my business and offered him a 30% stake in the company to come aboard and work with me to grow it.
My question pertains to the actual revenues and profits of the business. The business is only us two..and you could say that now, both of us are putting in equal amounts of work. The business is not making money yet, but I am preparing in case it does start to bring in revenue. Without giving specifics we sell certificates for goods. Each particular sale lasts about 10 days and then we collect payment. My friend is still currently employed full time and wants to make this new business of ours a success. He is wondering how we would handle each sale. He was implying that maybe we could share profits on each sale with ownership still at 70/30. I'm not sure how to best structure this..I mean since I started the company, should I be sharing the profits like this? I don't want to screw up our friendship, but I need an agreement that is equitable and fair for both of us. Any ideas?
Revenue, Gross Margin and Profit are not the same things. They are not interchangeable.
The revenue you generate from each sale. It goes to pay for the cost of delivering or providing that product/service. It is not divided up among the owners proportional to their percentage of ownership. The "profit of each sale' could be interpreted as "Gross Margin" -- meaning the revenue minus the cost to deliver that product/service. This is not profit to be divided up among the owners -- this is the margin to pay the costs of maintaining and growing your business.
I think you need an ownership agreement -- but you also need "staff" agreements for how you are compensated for doing sales, doing product/service fulfillment, doing management responsibilities. The division of these task and responsibilities will (hardly ever) be the same as the ownership division.
You need to divide the ownership hat from the management hat from the operations hats.
Thanks for asking this question and getting this taken care of before you are too far down the road!!
For the techs:
Profit = (Revenue + Investment) - Costs
Revenue = SUM(Sales) + Other income like government incentives and tax breaks.
Costs = Operational Costs + Wages (including yours) + Taxes and rent + Marketing + Advertising + Production + Coffee + Growth
You get to pay dividends on Profit as a percentage of the ownership or at $x per share held per period (normally per year), in our case quarterly.
Thanks guys. I get what you're saying, but since the business is so small, it's hard to kind of envision everything else that goes along with it. What i'm thinking is that i draft up an agreement that states that once the business reclaims a profit equal to the amount that I have invested in the company, we will start on even ground.
Then we agree to take 20% of monthly profits and place them in our business account (for whatever outside expenses we may incur). The remaining 80% of monthly profits would be split 50/50. I would still retain 70% ownership, but since he is putting his heart into this i agree to share the profits. Do you think this is fair for me? Should i be sharing profits 50/50?