Please Help Me - It's Very Urgent

**Vikram Raj** · 02-02-2012 02:10 PM

Dear Members

I am Vikram from Bangalore. I have a website through which i am earning around Rs.15000 to 20000 per month on an average as a part time. Recently 2 of my collegues are asking for a partnership in that website. They are ready to invest money almost 1 lakh for the 1st year(not at a time.. month by month) and they are ready to work along with me from now onwards.And for this 1st year i am not investing anything. And from 2nd year onwards they are asking me also to invest as like them.

So please tell me the proper partnership ratio for 3 people.

Brief Intro:

I am the owner/developer of that website. So total idea is mine and from the past 7 month i have worked for it without any profit. Ofcourse from previous 2 months onwards i'm getting the above said money. Just based on that amount per year i will get almost 2lakhs.

Since it is lifelong contract... please tell me the proper partnership strategy.

Waiting for your reply. Thank you!!

**JPStonestreet** · 02-02-2012 04:37 PM

Be very careful. A partnership is like a marriage, especially if you're working together. You'll spend more time with your partners than you'll spend with your family so you need to know them very well before making a decision. Be sure you have similar goals for the business, a similar work ethic and complimentary skill sets. If what you really need is a sales person or an advertising person, adding another developer won't help much. I'd recommend a trial period to make sure everything is going to work, unless you already know them very well and trust them without question.

The next thing you need is a partnership agreement. Define everything, and I mean everything, that might be an issue. What are the individual roles and responsibilities? How much will each person get paid and how are raises decided? How much vacation time will be allotted per year and is it paid vacation? What happens if one of them gets pregnant or their wife has a child? Do they get time off with or without pay? Who will do their work when they're away? Will you get key-man insurance to pay a salary if one of you gets hit by a bus? How will you handle the profits? Will you reinvest them or pay them out in bonuses or a combination of both? Discussing these issues upfront could save your partnership down the road.

As far as deciding how much percentage to give the partners, I'd suggest trying to determine how much your business is worth today and basing it on that. A quick and dirty way to calculate value is to multiply your annual revenue by 3. That's pretty conservative so you might want to use 5 or more.

You can also estimate the amount of time (in hours) you've spent building the business to this point and multiply that by the amount you would have paid a developer or other contractors to do it. Your goal is to get to your basis in the company: how much you've already put into it out of your own time and money.

Once you determine the current value of the business and your basis in it, you can figure out what percentage partners should get based on the amount of money they want to invest. So if your business is worth 6 lakhs and each partner wants to invest 1 lakh (hopefully I'm using your currency correctly), you may want to offer them a 16% share (1/6). I'm assuming you will all be drawing a salary. If they won't be drawing a salary but you still will, their basis will increase and they'll deserve a higher percentage.

I'd also suggest you require the funds be placed in an escrow account or stated in a promissory note if they're only going to pay monthly. The last thing you want to do is give away some of your company based on a future investment, only to have the money dry up before it's all paid. You'll want to account for this in your partnership agreement, too. What happens if they fail to pay? Do they forfeit their share? Do they have a grace period of a few days or a month? If they default, do you have to pay back the funds they've already invested?

I'm not sure how the tax laws work in India, so I'd also recommend speaking to a tax accountant for advice. In the US, we have specific tax laws around partnerships, ownership and basis.

The best partnerships evolve over time and develop out of a mutual respect for each other and each person brings complimentary skill sets. Most partnerships don't work very well and often end up destroying the business. Make sure you really need them and they'll add value before you agree to anything. If you need the money to grow your business, consider giving them a percentage for their investment only as silent partners and don't work with them.

Hope this helps. Good luck!

**Vikram Raj** · 02-03-2012 07:45 AM

@ JPStonestreet: Thank you very much for your quick response as well as for good suggestions. I hope this would help me.....

**loanuniverse** · 02-03-2012 10:43 AM

I actually had to look up the term lakh, but now that I know it is 100,000, I can better answer.

First, let me say that I agree with JPStone that the partnership needs to be well documented. You should make sure that you do delineate everything in the partnership as to who gets what and the responsabilities/benefits of each of the partners. Nevertheless, the important thing is that you never should lose control of the assets of the company {website registration / actual website / backups} that will protect you more than any agreement.

However, I believe your question is more of a valuation question than anything else, and would like to add to what JPStone wrote.

You have a valuation question here. Before you take the money, you need to figure out a few things:

1) Do you need the money? Selling a piece of the business is exchanging a stream of future cash flow for money now. Investors require a certain rate of return for the risk, if you can keep sole ownership you get to keep all of the earnings to yourself.

2) Will this money allow you to grow this website or start a new one? If you need this money to invest and the expected return of the investment is greater than the earnings that you are going to have to share, then it sounds like a good deal.

3) The revenue multiplier method and the calculation of already incurred costs are good methods, but I noticed that your growth has been pretty fast. I think you will be best served by preparing a forecast of how you expect the revenue to grow and do a discounted cash flow analysis. <-search google I am sure that there are a lot of examples. Look at it this way, you said that you are making Rs. 15,000 a month. Is it possible than in six months you could take that website to Rs. 30,000? If so, then you have a much more valuable website.

That is what I have off the top of my head

Loanuniverse

**Paul Morgan** · 02-03-2012 04:52 PM

If you are in business for real, then start acting like it. Get a lawyer and accountant on your team. They will be able to answer questions that you have, value your business and draw up a partnership agreement or shareholders' agreement. Rely on the pros to help you. Do it right, or don't bother.

PS a business advisor is another person you should find.

**loanuniverse** · 02-03-2012 07:54 PM

I agree that he needs professional help for the drafting of the agreement, but to bounce off ideas this is a good start. Everybody should know that an internet forum is not the place to go for legal advice, but to get initial guidance is great.

You also have to take into consideration that he is based in India, and if the website income is his only income the resources might be limited.

**Enzo1** · 02-04-2012 05:55 AM

I think you should consider doing it yourself pay them for the time they put in, if you believe in your website and trust you will make it big then don't cut them in.

**Paul Morgan** · 02-04-2012 06:15 AM

people struggle in business because they have their eye on the ball but are playing the wrong game. Right now it is about setting up the business properly. Yes I know resources are limited but if you just start running down hill you'll trip and fall. As i always say - Hurry up and slow down. Taking your time and doing things right will save headaches and money down the road.

**Vikram Raj** · 02-05-2012 02:11 PM

Thank you everyone for your valuable suggestions. Your suggestions are very helpful for me.

The main reason going for a partnership is i have less time to work on my website. Since i'm a Software engineer i couldn't spend much time on it. My partners also working people, so they also work as a part time. So totally 3 of us are going to work on this business.

Here are some of the points:

i) Based on my revenue per month (Rs.15000-20000). How much can i expect from my partners? (Shares will be i) Mine - 52% ii) partner1 - 24% iii) Partner 2- 24%)

ii) 3 of us are going to work on it in 3 different areas. So there is no much difference in work.

iii) In the first 1 year they are going to invest 1lakh rupees on this, but i'm not investing anything for the 1st year. From 2nd year onwards i have to invest like them as well.

Based on these points how much amount i can expect from my partners for selling 48% of share, apart from their 1st year investment 1 lakh.

**Vikram Raj** · 02-06-2012 12:32 AM

Hey Guys....

Any suggestion would be much appreciated....

**loanuniverse** · 02-06-2012 12:43 AM

You have a discounted cash flow valuation problem here, but it is not possible to answer without more information.

How much is each of the partners contributing? is it 100,000 each?

Is this contribution certain?

What kind of earnings do you expect for 2012, 2013, 2014, and the years after that?

You said that you are making 15,000 a month. If you make this much next month and you have partners, do you guys expect to take the money out every month?

How much are each of you expected to contribute for 2012, 2013, 2014, and each year after that?

And most important of all, what do you think is an appropriate rate of return?

It is not a simple thing to calculate in a fair manner. Even doing an analysis like this is unfair, because you might think that something like a 15% rate of return is fine, but the investor might be looking to double his money every year.

**loanuniverse** · 02-06-2012 12:52 AM

Tried to edit the post above, but the system did not allow me.

I wanted to add that I will also need to know if you intend to sell the website and if so when and what is your goal price.

If you provide me all of this information, I can put together a spreadsheet in a few minutes. But not going to do it unless you give me all of the information.