Gentlemen,

After spending years reading these forums and occasionally posting I do realize that "partner" is really a four letter word in this industry. I appreciate that, but I would like to table that side of the discussion and focus on how one would deal with adding a partner who doesn't have an equal value comparatively to the other business partner.

A foreword:
My business is quickly growing at a 20%+- right. After 5 years of honing my business solely on cabinetry I've reached my new threshold of $315k last year. This is with 1 employee and hiring a helper for the last quarter. Thereby, my business is 2 employees + me. I'm quickly finding that I'm more valuable in sales, marketing, and engineering.

Question:
How would one assimilate another like-minded individual into the company as a partner?

Currently he doesn't have any real assets in the terms of cabinetry. He posses a strong motivation, like mindedness and is open to expanding and diversifying the company. We've known each other since youth and have a strong foundation in friendship as well as likemindedness in craft. He would fill the void that I'm leaving in the shop production and continue filling the position of installer.

I'm considering offering a salary wage, on a 5 year plan, increasing each year to cap at 75k after 5 years. The 5 years is a reflection of how much blood/sweat/tears I've had to hone my business to where it is today. At the end of 5 years I would offer partner. Of course this would all be spelled out in a contract, but my hope is in another 5 years the business would be able to support two owners at a net total of around $240k. I haven't written a plan out yet, but would be interested in hearing other business owner's thoughts? This is very brief, and there are many unspoken factors, but I hope I've given enough to offer a value added discussion on the subject.

Cheers,
Ben

Since you've seen the past responses, (mostly negative!) I'll just ad something else to consider, legal entanglements. What if you get run over by a Mack truck? Where does that leave him?

My partner adventure was a disaster. I would suggest you discuss with an extremely qualified business lawyer. Not sure a contract could be written that would cover every situation. I'd contact your local SCORE office and see if any of the volunteers had done something similar. What happens if the economy tanks in the next 5 years, sounds like you will be bound tightly in a contract. Since you want to top out a salary at 75,000 in 5 years, you must be wanting to start them around $50,000. That would be a lot for someone with no industry skills. The only skills of theirs that you have listed are all personality related. They better have some serious business experience. Hiring a friend will be as precarious as hiring family. With 5 years under your belt, you've not seen a serious economic downturn. It's going to take one hell of a contract to protect yourself!

The first thing a partnership needs is a buy sell agreement. This is the roadmap that gets used if the partners want to split or if one partner wants to retire or a partner dies.

The second is life insurance polices financing the buyout in case of death of either partner.

It would help to have an outline or job descriptions as well as compensation from the business.

The company probably needs to be at the least a sub-s or llc.

Then there is the accounting. Some things you do a sole proprietor you can't do as a partner without the other partner getting a similar benefit.

Just think about the "expenses" to the business that benefit you personally, whether it's a car, a trip, work at home.

If you have a car as a business expenses whats the offset from profits for the partner?

Same issues for the minority partner, they can't just spend what they want on personal items.

If the partner isn't going to contribute equity then you will probably have to give it to him and that may take a few years tax wise.

So step one is see a business accountant who can walk you through the amth and recommend a business attorney so you have an idea of what and how you should do it.

The more upfront work you do and the clear understanding of how it will work and who does what will give the mechanics of the partnership a better chance at success.

I think a lot of splits ups that have complaints probably skipped a lot of these steps or didn't pay attention to the rules.

Thats not to say it may not work out in 3 ot 5 years or goals change, neither partner can control that, but having a map on how to split up makes it simpler.

I would suggest the potential partner comes in as an employee with a roadmap to partnership, that leaves you in control while the equity vests or the agreement switches to partnership. This is also something the accountant can help you with.

A

Larry,
Life insurance? And, not my question!

Rich C.
Not sure if I was unclear, but he does have experience in carpentry. He's an incredible installer, with lots of skill. He also has some vision for furniture which my company may allow him a springboard to get that started under the company name. No, he has no experience in a cabinet shop setting as a leader, but he has the bones for it.
I've been in business for 13 or so years now. I started working for myself the year before the market crashed. Those were hard days!

Alan F.
Lots to think about here.

Could you elaborate a little on this? "If the partner isn't going to contribute equity then you will probably have to give it to him and that may take a few years tax wise." And by "give it to him" you mean pay him so he can reinvest that into the company?
In other words, the word "partner" demands there be equal shares in everything unless a contract dictated otherwise?

Thanks,
Ben

If you consider this individual to be a personal friend, be prepared to dissolve both the friendship and the partnership. Of course there are rare exceptions, but unless you both are saints, and are able to put the others needs and desires above your own, you are destined for failure. This was my experience with my former partner.

315k if you’re in the states would suggest to me that you need to work on your operations and efficiency before bringing in someone who knows less about cabinet making than you do to run things. 315 with three people in cabinetry is way on the low end of sales per person. Bringing in someone now, unless they have strong business end skills, will only make the situation worse.

Yes on the insurance if your adding a partner, look up 'keyman' policies. Talk to your insurance agent - they range in price depending on what you want them to do - could just cover contracts of work in process or complete buy-out by the remaining owner.
Alan is spot on with the roadmap of which the CPA and the attorney consults are your first items to attend to. I am a one man band but after a couple years my CPA had me switch from sole proprietor to LLC S corp which was backtracking but a good move financially (Taxes). Having the LLC in place showed the financial community I was viable which lead to underwriting by a commercial bank and buying my building which included extra rental income to help with the mortgage which the CPA had me form second LLC Holding Co under a family umbrella separate from my business. Circling back life insurance was in place but required for the holding Co but curiously not assigned to the holding Co.

I don't want to preach but the first rule of business is to stay in business not build cabinets so talk to the experts and listen to woodwebbers.
I second Rich's testimony, my first partnership lasted 3yrs 20yrs ago and thanks to the partnership papers drawn up it's dismantling was pain free. The second recent endeavor never made past the agreement papers - what a relief.

Best of luck to you and the new marriage,
Tom (no harm intended)

Ben, it seems in your reasoning for bringing on a partner is that you're more valuable in sales, marketing, and engineering and need the other hats filled... that sounds more like a shop lead...

His motivation and like mindedness is easy to understand but keep in mind if you're not on the same page when it comes to his project of furniture, and you retain operational control, that can potentially lead to issues (i.e. - "I'm only a partner in name, more work but no control, etc.")...

It seems more that you've made the decision to make him a partner (have you told him already?), so if you're looking for the mechanics to make that happen, it's time to pony up the dough for legal representation to set things in order...

Personally, if you're intent on the partnership side of the equation, and he's not bringing any capital to the deal to justify a higher business equity, there's nothing wrong with giving him equity in stages for his role as he grows into a partner (even bonuses for starting a furniture line if he can bring it into the fold of the current business)... even lawyer firms don't just give out partnerships because the lawyer is contributing to the business... 8^)

As hard as it ,may be, your consideration of personal relationship needs to be put to the side...

Once he becomes your partner, on any level,he is no longer your friend. Hire him as your manager perhaps. And allow him to "buy in"at a later date if things go well.

Just because you have grown 20% does not mean it will keep doing it at that rate.

Keep in mind that you put in the work to get it to this point and you will always have more invested than anyone who comes aboard after the ship has been built.
Just hire him and see if you can work together day in and day out. Make your "partner decision " after the honeymoon has worn off.

Regards ..Harry DeVrieze

Is this partner going to sign on any loans? Probably not. Does not sound like a good idea. $315,000 isn't really that much. For two plus people, that is ok, but not enough to commit to bringing someone on at $50,000 as a trainee. I would look at sales. As stated above, you seem to be looking for a shop leader. You will have to develop a leader.

As someone who is still involved in a
successful business partnership that is
approaching 25 years, I would say Alan's
comments are right on.

A detailed and binding partnership agreement
is essential - it must be clearly documented
what happens if one partner wants out, what
happens if one partner dies, and also must
clearly document how the value of the business
will be determined if the scenarios above play
out, or if the partnership is to be dissolved.

Any ambiguity in those areas will almost
certainly result in bad feelings. I have
a friend who used to say that the problem
with partnerships is that one partner works
harder then the other. I feel there's a lot
of truth to that comment. If the difference
is minimal, I don't think it's a deal killer,
but if not minimal, a recipe for failure.

I've often commented that partnerships rarely
work well, but when they do, they work real well.

Some concerns that come to mind in this thread's
situation are:

- 20% stake - a flawless method of coming up with
the number that the percentage is applied to would
be absolutely critical IMO

- lack of owner experience - it sounds like the
incoming partner has not run a business before ..
I could see that being problematic. I think most
business owners would agree that the actual reality
of running a business is far different then the
perception a "newby" has when starting a business.

And I think I agree with the comment that hiring
someone to do what you're looking for a partner
to do makes more sense. If you hire someone, and
it doesn't work out, you punt. If you take on
a partner, and it doesn't work out, you have to
start the game over - ugh.

Finally - my observations over the years has been
that in successful partnerships, the partners
should share some traits, and not share others.
Organization, strong work ethic, appropriate
behavior towards others ... these should be
shared. Specific skill sets, exceptional abilities,
general personality ... it's often better if
the partners are diverse on these items. One
partner looking over the other partner's shoulder
is not only a waste of time, but uncomfortable,
and "tude" building.

My gut in this particular case is that a partnership
is not the best way to approach the issue that
generated the original partnership thought

Why exactly do you need a partner? Sounds like you need a working shop foreman. Maybe tie his compensation to his productivity, but why give up ownership of YOUR company. Think of it as investing in another piece of machinery that helps expand your capacity. We're here to make money not cabinets.

I also think you need to do about anything but take on a partner. I found developing a person into an office 'expediter' saved us thousands and got the jobs done. This person did most delivery set-ups, purchasing, phone answer and call, run the fax machine, chase off peddlers, enter and pay bills, etc.
In short, for less than 35K a year, I got about 20 hours/week of my time back. Now, that also meant I had to be a lean, mean quoting machine, so I tightened up on my side also.

Ben,

"If the partner isn't going to contribute equity then you will probably have to give it to him and that may take a few years tax wise."

For the many ways to do this you need to speak with an accountant, this isn't a situation that can be figured out via the internet, you may learn a lot of the details but it takes an educated professional to guide you.

For sake of discussion lets say your business has a book value of $100,000.

The new partner is going to own 20%. You are transferring $20,000 to someone and that has tax implications. You can't "give" $20,000 away and not have taxes owed.

Option 1 direct buy in or purchase agreement.
Option 2 gift over a few years based on a formula an accountant works out.
Option 3 earns ownership as an employment agreement, need an accountant and a lawyer

But BEFORE that can happen we need to know how much the business is worth without "blue-sky" and an accountant will determine this as well as how to determine its value 3,5 and 20 years from now.

So you can read all you want but the best call is to an accountant that does business accounting, not one that just does taxes.

A-

Larry, Rich C., Alan F., Kip, Kap, Small Town, Tom D., Harry, Paul, Sam, Daniel, David,

Wow, thanks for coming out to play! I appreciate the time and effort. Really.

This discussion I'm going to save, as there are quite a few points that may be helpful at a later date. Many things I haven't thought of -- but that was part of the purpose of my post. To flesh out what it means for partnership, even if the question was simply put. Looks like I need to read some books.

I took the time to *FINISH* allocating what I have in net worth not only for my machinery, but the cost to get it fully operational(that's a real thing). $125k +. Partner is about the furthest I can think of at this point.

For his sake:
Imagine an individual who is pulling up roots after a tremendous education on carpentry. Pair that with a love for wood, motivation to make something of themselves, and a vision. *mirror*
I see potential in this youth, and he could definitely make something of himself, and perhaps have a springboard for that? Yolo!

We make cabinetry to make money? Or do we have a cause, a "why" we do this? I do this to preserve my heritage. 6 kids later... yeah.

Aside from that, I really do need a lead(thank you for pointing that out Kap). I found a willing individual last year and have been training, but my time is so split that the mistakes are glaring when I can't watch them at the bench. Or at least someone to run admin (David S).

The entanglement of partnership is eye opening. All the points made by the crew are legitimate and important. One point I really appreciate is having similarities in character, but talents in different skills. This is probably the best attributes of a good partnership, and something everyone should ponder objectively.

My wife is begging me to get off the forums at this point. Thanks gents.

Regards,
Ben

I know that this is a little off topic but I think that it should be said. We have someone on board that has all of those qualities that even owned his own shop for 20 years. It was not closed due to financial reasons. He has greatly helped with ways to make the shop better. He is 100% salary with the understanding that he gets raises as the business gets more profitable. We also bought a CNC and an edgebander. Within a year our shop went from 12 to 6 employees and we are on track to produce about 25% more with half the amount of people in the shop. You could buy a $40,000 (cam master) cnc and a $12,000-$15,000 (cantek) edgebander along with outsourcing all doors, drawer boxes, and installs. By doing this I would bet that your shop could produce $600,000 plus without hiring anyone. All of this will allow your guys to do what they do best and what makes you the most money produce cabinet boxes. Outsource everything that you can and make the shop flow as best you can.

Been there, do not recommend it.

The reason I've done it is because there was to much work for one man and it was easier to share expenses and workload, at least at the beginning of our business adventure. Probably same reason as with 99% of all partnerships.

I could not imagine being aligned any better than with my ex business partner, at least in the realm of work and business, and that was the only thing I cared about at that moment (didn't now any better than).

However, every man is a world for himself, and that's something that will surface sooner or later, probably sooner than you think.

In the business domain you may get some things done faster, like actual manufacturing/installation work, but you will also get slowed down at other, like making decisions, buying equipment or making plans, because you'll have to consult your partner, who may have different opinion and stall your actions until you find a common ground.
There's endless list of things from that domain, but I wan't go further because those are nothing compared to private issues.

Your business partner will likely have a girlfriend, a wife, mistress, kids, family, friends,... and all of a sudden all these things become a factor in your business.
He's girlfriend is high maintenance b**** that fills your partner's head with garbage that deteriorates your relationship with him or his ability to concentrate on work; his wife wants new house now so you have to wait one more year for that edgebander you planed to buy this year; his parent is sick and need expensive surgery; his kids need money for this and that; his wife has left him and the divorce is expensive; you wanted to buy cnc, but he wants (or they want him) to take his family to vacation to Europe.... You go against any of his "personal needs" in favor of the business ones and you're on your way to Hell.

I imagine such thing could work with partners who are NOTHING MORE than just business partners, two people who met each other just for that purpose and have a contract that specify X% of the profit gets reinvested in business and Y% goes to owners to spend however they like, no exceptions, no special circumstances, no emergencies....

But with a friend,.... Do not do it if the potential gain of that adventure does not greatly overweight the risk of losing both the friend and the business.

Ryan has a good point. When I had a partner & wanted to buy something the response was usually "We don't need that , I did it the old way for years perfectly well."
To avoid stand offs you might consider a 3rd person in your corp. The deciding vote when the 2 of you can't agree. Load it in your favor, your dad? He could be a valid choice if you had a very minor investment.