Contract with partner

Hello,

My question is of a general nature. I may take up a franchise along with a partner who is going to be investing 10% only. I have not worked with any partners before, so I need some help regarding the contract. Some questions which come to mind are
1) Since I am going to be investing 90%, what should be in the contract for me to be having control in the business or rather what kind of control should I be looking for? What kind of control can my partner have?
2) In the future, if my partner wants to leave and wants to sell his 10% stake, how would we calculate how much the business is worth and how can we make it in such a way that there is no dispute? On the other side, if he wants to increase his stake, how would we go about it?
3) What other clauses should I have in the contract.

Thanks

Dave.

You need an attorney to handle this. The considerations you have should all be spelled out to your attorney and included by him in your partnership contract.

I am definitely going to use an attorney. However, it would be good to know what kind of issues are faced by others in partnership.

Thanks.

quote:

Originally posted by RockFort

I am definitely going to use an attorney. However, it would be good to know what kind of issues are faced by others in partnership.

Thanks.

That's what you hire an attorney to tell you.

I agree with your using a lawyer, but I have to ask the question. Why do you need a partner at 10%? Surely not for the cash. If it's some kind of reward for a friend, co-worker, or employee just set up profit sharing. Partnerships are very tricky and full of pitfalls. No matter what the percentage, when you take on a partner you now have someone to answer to. Just my opinion.
Greg

Hi Greg,

You are absolutely right. I am not taking him in as partner for the cash. I need his expertise in the business. Currently we seem to agree on most things. One thing we are on two sides are, he thinks it is better to sell the business after 5 years and move on. I am thinking that if it is doing well, why sell? We have our own reasons for thinking that. So I want clauses in to decide how we will part ways in case he wants out after 5 years. The sticky point is how can I calculate the fair value after 5 years to buy him out without any dispute. I want a clear exit strategy.

Thanks

Greg,Let me give you some advice that my Banker and everybody tried to tell me,Get rid of Him!Dump Him,you dont need a Partner!I just open a Restaurant last April with a Couple who were good friends till we went in together and its been a nightmare!They have done everything they could to sabatoge the bizz.I went last week to my investor to get 40 grand to buy them out and get rid of them forever.This was one lesson I will never forget.I could go on but I dont have time.Save yourself some heart ache.Go alone.

I agree with Jelly. With that amount of investment which is small, You do not need that kind of stress. Make it or lose it on your own.

Paul E. Smith
Knoxville, TN

I'll jump on the bandwagon. Forget him.

Here's my thinking:
1. If you don't know enough to run this business without the guy, you don't know enough to open it in the first place.

2. Not questioning anyone's honesty, but 10% isn't much incentive, and IF the place is successful, and IF, like so many small businesses, it's mostly cash, you're just building a scenario for disaster.

3. Valuing small businesses is extremely difficult. Unless there's real estate involved, or your lease becomes immensely valuable (you have a ten-year lease with a ten-year option at a very low rate, and suddenly find out that something - road improvement, new building, etc - is happening across the street and your traffic flow will increase 5000%), the major value is usually in cash flow.

4. If your partner-to-be becomes the main appeal of the business - like a fabulous maitre d' - he's got you over a barrel.

5. My recommendation (I'm assuming, perhaps wrongly, that you're going to be at least a partially absentee owner): spend a lot of time studying the kind of business you want to open. Hire a manager, after vetting him extremely carefully. Learn, from your accountant, what kind of daily, weekly, and monthly reports you should get to be able to keep a handle on business. Drop in frequently, and unexpectedly. Make sure the inventory actually exists. Make sure the restrooms are squeaky clean. Ditto the staff. Do some comparative pricing on purchases.

6. If you still need help, look for a consultant. I'm not fond of them, but at least you know your liability.

Good luck.

Bill

10%? just shoot him now and be done w/ it.

I did not expect so many 'Nays' for having a partner. Thanks everyone for the input.

Bill, to give a bit more detail, it is a restaurant I am talking about. The partner will bring in expertise mainly in the kitchen. I will be taking care of all other hiring, procurement, accounting etc. I have to partner with him for some reasons. His expertise alone is not the main reason. So I will take your recommendation. Your assumption is correct. I will be a partially absentee owner. This will be an investment for me. For the first year, I plan to spend a lot of time at the premises. After that I am planning to reduce gradually. I know that in itself is a different topic for discussion.

Since it is a Franchise, I am assuming that they will have sufficient control measures in terms of reporting, inventory etc.

So my questions still remain from my first post.

Thanks

Dave.

Good luck.

One last question: I'd always assumed that any good franchisor provided extensive, minutely-detailed operating instructions, both for the good of the brand and the success of the franchisee. Isn't this the case?
I know people who owned McD's who didn't know a spatula from a cleaver, and made lots of money.

Anyway, again, best of luck. And keep your eyes open.

Yes Bill, from what I know, this Franchise Outfit has good instructions and the people who are running it supposedly have over 20 years of experience in the industry, but I am yet to see it myself. I am very much in the initial stages of the process. There are still a lot of work to do. Having a partner is part of the process. I may even look at different Franchise Operations.

My partner is the one bringing in the deal, and he currently is in a 50% partnership in another restaurant of the same Franchise. He is recommending the Franchise based on his experience dealing with them. So I am in the process of collecting more information about the entire operation.

Thanks

Dave.

If you decide to go ahead make sure that he is not free to sell his shares to just anyone. You should also have a set price to purchase them from his estate in the event of his death. You might not like his wife or kids as instant new partners. If he is important, you might decide to take out a life insurance policy on him.

No...what you are doing is giving him 10% of your business, if it's a success then he will always own 10%, if it fails he is only liable for 10%...not much incentive if you ask would ask me.

Move that system over to a quarterly bonus, yearly bonus or stock option plan that will give him some incentive to:
1) Go for growth.
2) Control Expenses.
3) Stay with you.

That being said, I don't like partnerships, they are cumbersome and 90% of the time backfire. Remember, if this guy leaves you, you are basically screwed. You are putting your investment in his hands. Think about it.

So...What is the franchise??? I don't need location etc, just wondering what it is. Surely you're not sworn to secrecy so let us know what you're opening.

I have not firmly decided on the Franchise yet. Since this is a downtown location, I have to be a bit careful in the selection to cater to the downtown crowd. I don't want to pick a suburbian type franchise for a downtown location. What type of restaurant is suited for downtown. Do you have any suggestions?

I am in Canada and I am thinking of Casey's or similar.

i agree you have to be very careful! hopefully, my palce will sell soon, and i will be free for such a partnership in the philly area.
why not suburb type in downtown? after all. most of the downtown workers commute from suburbs. are you targeting lunch or dinner?
know your targets. wether it be people, or numbers, or flavors. know it, and how to achieve it. my cousin had a pizza shop downtown. crash! no dinner, as everyone went home at 5.
.99 cent slices wont pay the downtown rent.
just be careful, your in a riskey market.