Planning a partnership. Logistics of revenue sharing?

I’m in the planning phase of a new, 3-person business partnership. The idea is to split all investment and profits equally. That means all three of us will share the workload, share in the cash outlay, and share in the profits at an equal 3 way split.

We agree on the “principals” of our agreement. What I’m unclear about is how to plan the logistics of revenue sharing.

My questions are:

After we reach our break-even point…

  • Should we define a set monthly salary for each partner, with the remainder going back into the company? If we see larger profits than expected, then we pay out bonuses at a planned date.

  • Or should our monthly share be a percentage of profits? For example, each of the three partners gets 25% of profits, with the remaining 25% going to the company.

  • What would be a good rule of thumb on deciding what percentage of profits gets reinvested in the company? What percentage should be budgeted for marketing?

Just looking for general guidance, examples, etc. If you’re a business owner and involved in a partnership, I’d love to hear about how you structured things for your situation. What works? What doesn’t?

Thanks in advance…

I went into partnership with someone last year, he mainly did design and CD-ROMS, and I did web programming. As a company we have various different clients, some who required one service, with others required another.

The problem we had is that at times one of us wasn’t very busy, while the other was absolutely snowed under, working evening and weekends. At the end of the month, both would be paid the same amount, and any profit left in the business.

Our partnership ended, mainly because I went on honeymoon for two weeks and was still getting paid (we agreed we’d get paid for holidays). During these two weeks, he was left to handle every client, was absolutely bogged down with work, and got really annoyed that I was still getting paid while he was working his but off. Most of the time it had been the other way round, with my bringing the most money into the business, but I didn’t complain. Anyway, my partner decided to move away from the business and take his clients with him, where he wouldn’t have to share any of his profits.

Since then his main client who provides 99% of his work are in a bit of a financial pickle, and he’s owed just over £20k for the last 4 months work, they just keep putting off paying him. So in a way I’m kind of please the partnership didn’t work.

Be careful

While managing our time between our current work and this new business might get tricky, I’m not sure we will run into that exact issue.

This new startup is a product-based business. So even when traffic gets heavy and business picks up, that won’t necessarily mean a huge spike in the time investment needed on our end.

Every month will bring a certain amount of production goals, but those goals are somewhat irrespective of the amount of sales we make for that month.

Does that make sense?

What I’m really interested in, is how should we operate the revenue sharing model?

Companies without bosses don’t function. Split profit however you want, but one of the partners needs to be in charge. I can’t stress this enough. Be careful.

I won’t give you direction on the revshare side of things, because that’s ultimately up to you guys. The easiest way to do this is for each of you independently to say if the business w as making X profit, how much you’d liek to reinvest, how much you’d like to pull out and how much you’d like to use for salary.

You then back that out to the current revenue numbers and see if that makes sense. You might find you’re in very close alignment, you might find you’re very far apart.

Some thoughts from a recent business:

  1. Someone has to be in charge, you CAN’T make decisions effectively as a collective without it dissolving in outrage… it’s always 2 against 1
  2. Saying everyone’ll do the same amount of work is nice. But nobody ever does. There needs to be a change in revshare and/or % of ownership for those who don’t pull their weight (which is different than someone else working more just cause they decide to)… s et out, CLEARLY, how much is the minimum… if folk want to do more, that’s great and is them protecting their investment.
  3. You need to agree on how to vote someone off the island, and what happens when they are. If it’s for them not doing their part, do they surrender their share? Do they get a prorated payment? Is it required that the partnership buy them out?
  4. Talk about “what if” scenarios: what if it grows faster/slower than expected? What if none of you can agree on something? What if you get an offer to sell? Mapping out ALL the scenarios NOW will make things easier in the long run.
  5. If you guys AREN’T agreeinng, don’t FORCE the partnership at this early stage. Seriously, if things aren’t clicking now, theyr’e REALLY not going to click later.

Remember, a business partnership is like marriage. Except there’s no sex to make you happy.

Thanks Jeremy W. All excellent points.

Followup question - What would you (anyone) suggest is a fair / typical way to handle the buy-out question?

What I mean is, suppose a partner wants to call it quits. How do we determine up front what the buy-out price would be?

related question, what happens when a partner wants to back out before the break-even point is reached? Are they entitled to any type of buy-out price? Compensation for the time they already put into the project? …my thinking is no. If you call it quits before the company is profitable, then you forfeit what you put into it. This business partnership should be confused with a “work for hire” situation where partners are guaranteed compensation. There should be shared risk involved.

Am I wrong?

I, personally, wouldn’t do any buy-out pre-profitability (or pre enterprise value anyways), since everyone’s been investing money in… and if the individual wants to walk away, they forfeit that.

That said, sometimes it’s poisonous for someone to be in, and if the two of you want to kick him out, you shouldn’t be able to do it for free just cause you’re “not yet profitable” either, that’ll just leave room for abuse.

My suggestion would be to set out 3 milestones pre profitability and the value of the business at that point. Divide that value by 3, then discount it by a fair amount (cause the dude’s leaving) and make that the amount. After profitability, use an industry standard multiple, divide by three and again give it a discount (to compensate you guys for your increased risk).

The above opinion is free, and worth every penny :wink:

I was thinking of writing something, but I don’t think I could add any better advice than Jeremy W.

I also 100% agree that you need only one person making decisions. Put any egos aside and choose a General Manager for the business. The GM should then be responsible for implementing the strategy that the three of you decide in your strategy or director meetings. You can all have input to the company/business strategy, it is just one persons responsibility to ensure it is implemented.