Carving Out Your Piece of a Business
By Karen E. Klein
Q: My partner and I are starting a new food business. One of our suppliers has suggested that we enter a joint venture with them, and we like the idea of shared financial risk. However, they want 49% of the company, and we're concerned about prematurely giving away so much. Any suggestions? -- M.S.G., Toronto A:
Q: My partner and I are starting a new food business. One of our suppliers has suggested that we enter a joint venture with them, and we like the idea of shared financial risk. However, they want 49% of the company, and we're concerned about prematurely giving away so much. Any suggestions?
-- M.S.G., Toronto
A:Ownership percentages should be calculated based on the amounts of equity invested by the parties involved, experts say. The simplest form of equity is cash. If there were no other variables in your pending partnership, each of you would share ownership on the basis of how much cash you had shelled out.
However, in your case, there's much more than cash at stake. How much time, effort, research, expertise, and money have you and your partner put into this new company to date? Sit down together, think about it, and try to come up with a way to put a dollar value on your contributions.
Drawing up lists of what each side in this negotiation would contribute is a great first step, says James S. Twerdahl (www.twerdahlassoc.com), a Los Angeles-based investment banker who deals in financing, mergers, and acquisitions of small businesses.
"It may not be possible to assign dollar values...but they should at least be noted for points in the negotiation of the final percentages of ownership," he says. "As a rough rule of thumb, I have seen founders' shares being about 30% of the total just for the idea, initial sweat equity, and putting the plan together."
Some other points to put on your side of the ledger: How valuable is the basic business idea? If it's something unique and innovative, give it more weight. Do you own any trade secrets, patents, or trademarks that will be used in the business? If so, what's their value?
When you're negotiating the ownership percentage, you'll also want to take into account whether you and your partner will be employed by the business and receive salaries, or just split profits with other investors at the end of the year, Twerdahl says. "If you take salaries, are they more or less than they would have to pay someone hired from the outside to do the same jobs?"
On the investor's side, will the vendor give you free goods or payment in kind? Will you get ongoing discounts from the vendor? Will your business substantially help boost the vendor's business? Will the new company be required to buy exclusively from the vendor, or will it be allowed to negotiate best prices from the market at large?
When you're negotiating a deal like this, it's important to bring in a professional who can represent your interests. Along with getting you the best possible business deal, a good financial adviser and small-business attorney will ensure that a fair process is set up to deal with the fallout in case your partnership goes sour -- as many ultimately do.
And be cautious: Your vendor's proposed terms raised a red flag with Gerry Breitbart, a longtime food consultant with the California Restaurant Assn. "I'd be very leery of this offer," he says. "You must have a very good concept that a supplier thinks they could take over fairly easily. I would not let them have more than 20% of the business, and I'd make sure I always checked their prices to keep them competitive."
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Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues
Edited by Rod Kurtz