New Business Startup Question

Giving up 50% of your company before it exists is not a good idea. 50% means all decisions have to be made together and if you're ever at an impasse on something you're stuck. He also holds an advantage intially because he put the money up. Your position grows stronger as the business grows stronger and becomes about you and the relationships you build with your clientelle.

I'd structure it as a loan with payments not beginning for a predetermined period of time so the business has a chance to get on stable ground before taking on payments for debt. I'd also negotiate a much lower stake in the company for the investor.

Buy out would be 1/2 of ebitda after 5 years. Sharing 1/2 profits and I will draw a salary that will go towards costs.

20k in cash... I figure 60k just to open the doors (signage, computers, office items, insurance payments) includes 20% for 100k loan.

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Also figure 25k per month in operating expenses.

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Can you list the expenses that get you to $25k a month out of the gate?

RULE #1 in starting a business. Don't pay yourself with other peoples money. Pay yourself when the business can afford to pay you.

I'm going to elaborate on what I said above. Growing a business takes capital. First, you're going to have a $10000 loan to make payments on IF you can get a loan. Secondly, your investor isn't investing in your business. He's essentially setting up a loan that will take 1/2 your profits for a minimum of five years. As I said, growing a business takes money. You giving away a very large portion of the companies profits every month to pay off debt out of the gate. On top of that you're drawing a salary before the company can afford to pay you a salary.

You are giving yourself little to no margin to grow the business with or succeed. You need to take a very hard look at your numbers and projections and view them with the worst possible scenarios to see if the business can survive. Do you have a business plan?

I'm giving this advice as a business owner who has had two businesses. One that failed and one that is succeeding.

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I get that but would you give up half of profits for 5 years plus the EBITDA after five years? And how is that exactly determined? 1/2 of year 5 profits plus half every year? I'd be slowrolling my profits in that situation.

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It depends upon what this "advice" looks like.

Some deals it's not uncommon to have a "money guy" silent partner and the "work guy".

He's not going to likely make much if any profit in the first couple of years, so half of nothing isn't too big of a price.

Sounds like most of his startup costs are fixed assets which would qualify for 100 percent first year depreciation. I would consider setting up the deal to give the money guy a large share of the losses in the first year or two. There's value to the money guy in those losses.

Yes, clearly you need a better definition on that buyout. Put a stipulation in there that says anytime after 5 years, the money guy can be bought out for the valuation of his 50 percent interest as determined by a business valuation expert. Him and the partner each hire one (both paid for by the business or by the OP) and if they disagree, split the difference.

How strong are you financially and credit wise? You new business should qualify for a SBA loan which are typically 10% down with a term of 10-20 years on the repayment. Some banks will fund small business loans without the SBA too. I'd get a loan instead of giving up 50% equity.

If you go the loan route you may want o hire an accountant or finance firm to put together a business proposal for you with projections of your first few years revenue and such. Don't walk into the bank just spit-balling numbers. Be prepared with a plan on paper.

What are margins like in this type industry? Can you afford to give up 1/2 your income?