two business partners want to start a business... (lease, loan, debt)

[catlovr8]

Hypothetically, if two people had a good idea for a business and wanted to open it together, and this business requires a retail-ish store area and needs to be built which may cost close to $1M.

and hypothetically, if there are two people involved in this idea, one with basically the capital (or ability to take out a loan for the capital), and the other is interested in performing the day-to-day operations of the business, i.e., running the place,

Obviously party A who is putting up the money has a greater risk; however, party A also has the ability to sell the land and building if things go sour...

Party B is taking a risk of opportunity cost as (s)he will be quitting a full time, well-paying job to invest time into the business.

So does anyone have any idea on how to structure this business, money wise? Both parties are taking risk and obviously should be rewarded appropriately for the risk they are both taking. Obviously Party A should be the number one bread-winner and owner of the business. Or Party A could build the building and then rent the building to the business which is run by Party B and half owned by both parties. Any other ideas?

[pghquest]

Clearly with that large of a venture you would create a corporation, to shield liabilities of both parties, and then each partner would get a % of the stock as ownership.

Party A would loan the corporation the capital needed in exchange for an established rate of return until the loan is paid back, securitized by the land and building to protect their interest..

Party B would receive a set salary in exchange for the labor.

Since both parties would then own a percentage of the stock, as the debt gets paid down and the value of the business improves, both of their stock value would climb rewarding them for their part.

That being said, most retail ventures dont own land and buildings, they are leased under a NNN lease agreement because then the expense is a tax write off and it frees up the capital.

[sjdemak]

The one with capital should retain 90% equity and take no salary, the other 10% should go to the daily operations manager who is salaried. The capital is a bigger value proposition than daily management duties.

[pghquest]

Originally Posted by sjdemak

The one with capital should retain 90% equity and take no salary, the other 10% should go to the daily operations manager who is salaried. The capital is a bigger value proposition than daily management duties.

that really depends because the way the OP is describing the transaction, they are planning on purchasing a property. They very much need to rethink this strategy unless the plan also includes buying a destressed property and then using the lease as an asset to increase the property value and then flip it at a higher value to expand, thus moving from being a landlord, to a tenant situation.

A lot of corporate america is build on that strategy. CVS and Walgreens for example, both sign 30 year leases and sell properties for millions of dollars using the funds to expand.

[Wartrace]

Originally Posted by pghquest

Clearly with that large of a venture you would create a corporation, to shield liabilities of both parties, and then each partner would get a % of the stock as ownership.

Party A would loan the corporation the capital needed in exchange for an established rate of return until the loan is paid back, securitized by the land and building to protect their interest..

Party B would receive a set salary in exchange for the labor.

Since both parties would then own a percentage of the stock, as the debt gets paid down and the value of the business improves, both of their stock value would climb rewarding them for their part.

That being said, most retail ventures dont own land and buildings, they are leased under a NNN lease agreement because then the expense is a tax write off and it frees up the capital.

Good advice.

[doodlemagic]

Originally Posted by catlovr8

Hypothetically, if two people had a good idea for a business and wanted to open it together, and this business requires a retail-ish store area and needs to be built which may cost close to $1M.

and hypothetically, if there are two people involved in this idea, one with basically the capital (or ability to take out a loan for the capital), and the other is interested in performing the day-to-day operations of the business, i.e., running the place,

Obviously party A who is putting up the money has a greater risk; however, party A also has the ability to sell the land and building if things go sour...

Party B is taking a risk of opportunity cost as (s)he will be quitting a full time, well-paying job to invest time into the business.

So does anyone have any idea on how to structure this business, money wise? Both parties are taking risk and obviously should be rewarded appropriately for the risk they are both taking. Obviously Party A should be the number one bread-winner and owner of the business. Or Party A could build the building and then rent the building to the business which is run by Party B and half owned by both parties. Any other ideas?

The person quitting a job really doesn't get any bonus for that. The other business partner could just as easily go hire an industry expert and pay a salary and not give away equity, so you quitting your fulltime job is a decision your making doesn't really factor into what you should get as a percentage, though I do agree if your part of the idea and founding you should get a percentage.

As far as saying if things go sour your partner can sell stuff, who cares, he puts in a million, things go sour he probably recoups 300k if he's lucky, that's hardly a selling point to him. He is taking all the riska nd selling for pennies on the dollar after things go sour is hardly a good consolation prize.

[City Guy997S]

Originally Posted by catlovr8

Hypothetically, if two people had a good idea for a business and wanted to open it together, and this business requires a retail-ish store area and needs to be built which may cost close to $1M.

and hypothetically, if there are two people involved in this idea, one with basically the capital (or ability to take out a loan for the capital), and the other is interested in performing the day-to-day operations of the business, i.e., running the place,

Obviously party A who is putting up the money has a greater risk; however, party A also has the ability to sell the land and building if things go sour...

Party B is taking a risk of opportunity cost as (s)he will be quitting a full time, well-paying job to invest time into the business.

So does anyone have any idea on how to structure this business, money wise? Both parties are taking risk and obviously should be rewarded appropriately for the risk they are both taking. Obviously Party A should be the number one bread-winner and owner of the business. Or Party A could build the building and then rent the building to the business which is run by Party B and half owned by both parties. Any other ideas?

I will tell you how this will end:

1. Working partner will feel underpaid, over worked.
2. Financial partner will be disappointed in his rate of return and will blame the working partner.
3. Working partner will miss the "well paying job."
4. Partnership will blow apart with both sides taking some type of loss.

Partnership is a poor ship to sail on.........

[Caltovegas]

Talk with an Attorney.

[pghquest]

Originally Posted by catlovr8

Hypothetically,

Originally Posted by Caltovegas

Talk with an Attorney.

Would that be a hypothetical attorney?

[thatguydownsouth]

Do a 50% - 50% ownership split. Youre both making sacrifices. Rather than looking at the risk youre taking, look at what youre OFFERING the business. One is offering financing and the other is offering their blood and sweat, and hopefully experience.