What is a fair profit split?

[bdog01]

Situation:

I am looking to buy an existing business for roughly 3.0 million. The current owner is looking for 10% down and will finance the remainder at a very attractive rate. This place has been in business for 35 years and has very strong and consistent financials.

The plan is that I will put up 200k and a friend of mine will put up another 200k (300k for the down payment and 100k for some start up capital). I will be the full time day-to-day guy running the show. The friend will be putting in some hours, but they will be very minimal. This friend will not be completely absent, but he will be putting in very minimal time compared to what I will be putting in. For example, If I will put in an average of 60 hours per week, he will be putting in an average of 5 hours per week.

For my work in managing the business day-to-day, I will be collecting a very reasonable salary along with a nice benefit package (health care, 401k, etc...). My partner will be paid an hourly rate for the very small number of hours he will be putting in. My partner will not have a benefit package.

My question is regarding the profits that will remain after everything is said and done. Based on their past 3 years, our projections indicate that we will have between 50k and 175k per year in profits that need to be split up somehow.

What would be a fair split for those profits? Should this friend be a 50% owner of the business?

This will be less of an issue in about 3-4 years. In 3-4 years, my friend will be able to work 30-40 hours per week on the average (still not as many hours as the 60 or so I estimate I will be working). How does that change things? What is a fair percentage of ownership to give to this guy?

[ikeswholesale]

Well if your both putting in the same amount of money, it would only be fair to split the profits 50/50 no matter what hours each of you work. It's a financial investment into the business from both parties and should be looked at from that viewpoint instead of the hours. Hope this helps!

[jasaunders]

Not sure why you have profits that you "need to be split up" every year. Have you considered reinvesting in the business. That usually encourages the business to grow, rather than stay stagnant and/or become uncompetitive. Regardless, no one here can tell you what the ownership in your business should be. It should be whatever you can negotiate. Hell, if you could convince your partner to give you 95%, that's the way to go.

[bdog01]

Not sure why you have profits that you "need to be split up" every year. Have you considered reinvesting in the business. That usually encourages the business to grow, rather than stay stagnant and/or become uncompetitive. Regardless, no one here can tell you what the ownership in your business should be. It should be whatever you can negotiate. Hell, if you could convince your partner to give you 95%, that's the way to go.

Your assumption that we will not be reinvesting in the business would be incorrect. We have budgeted 3.5% of each year's gross revenue to go into a capital improvements fund. For this business, that is slightly above average. We have also set a threshold amount. All profits greater than that amount will go towards paying off the principle on the note.

I was simply trying to get some additional viewpoints on what others though was a fair split. I have had extended discussions with my partner regarding this topic. I have also consulted with several key business "friends" to get their take on it. Just trying to get some opinions that I know will be completely neutral.