Advice on setting up a business with a partner

[Sacha]

Hi. I don't suppose anyone could give me some advice on the following predicament:

I have been offered to incorporate a new company and become a 50% shareholder with another individual (who would also own 50%). From my understanding both he and I would be directors in the company, however he would not be involved in running the day to day operation.

I am just wondering if there is anything I should look out for in the articles of association or a shareholders agreement that will come back to haunt me in the future?

The business in question is a restaurant. My potential business partner owns the leasehold on the property (in his personal name) and I am unsure whether the leasehold will be transferred to this new company, or whether he would be subletting the property to this hypothetical new company (there are 10 years left on the leasehold).

I am relatively innocent in terms of business and therefore feel somewhat hesitant about going ahead with any potential deal as a small part of me is frightened that I am effectively being ****ed over. Basically the individual in question is a multi-millionaire and has numerous accountants and lawyers under his pay so he will be entering the agreement with professional advice, and years of experience which and I do not have.

Any advice, opinions or experiences would be really helpful as this could prove to be an immensely profitable business. It is risky and could fail but it has huge potential. The business in question has a fantastic reputation, is located in a beautiful building and has a huge capacity.

Basically what I was considering is to shorten the menu so that we would only be producing pasta and pizza and correspondingly bring prices down to the £7.95-£9.95 for a choice of either a soup or a salad as soon as the customer sits down followed by a main course of either pasta or a pizza (all hand made daily, yadda yadda) so as to compete with Pizza Hut, Ask, Dominos, etc in terms of price but beating them on quality of product and service.

Gross profit on the food would be in the 50-60% range, however I would be making 100+% gross profit on the drinks, desserts and side dishes. I would also start a takeaway and delivery service which I am sure would be well received and could potentially supply supermarkets or local food retailers with ready-to-bake pasta dishes.

Furthermore there is potential to open a second restaurant or bar in the premises and the building further benefits from a lot of unused office space that could be let out (though this would probably be difficult as there are a lot of empty offices in the town I am located in).

The only draw backs are that the overheads are quite large. We're talking fixed costs of around £2000 plus a week, so I'm guessing takings would need to be in the region of around £6000-£7000 for it to be a stable business. This is feasible, however it will probably take around 3 months to get to this level of turnover consistently.

Any advice, criticisms, opinions, questions, etc. I would really appreciate it.

 

[Allan123]

If in doubt... pull out. It's the only sensible option. I didn't even get to reading your bit fully about the menu, but had the muitl-millionaire & lots of solicitors etc bit on my head and just thought if it was me, and i was under-eductaed on business and going into business with someone as seasoned at them (i aussume he/she is a self made millionaire) i wouldn't bother.

As attractive as it may seem, they being a previous success, why bring you into the fold? They can make their money (and have plenty of back up capitol) without out you involved.

 

[Billmccallum]

A couple of points to raise...

How much are you putting into the business?

Having a 50-50 partnership/shareholding is never a good idea, how do you make a decision if you disagree about something?

If this company is set up and fails, who will be responsible? Your partner will simply be a shareholder, whereas you will be the MD (by the sounds of it).

You need to know how the property will be dealt with... it's a little confusing trying to understand why a millionaire will want to get involved, if he's not going to be involved!!!! does that make sense?

I'm a cynical grumpy old man at times and my cynical head says there is a chance that he has the lease on a property thats losing cash, so he offloads it to your "new" company. If it goes wrong he's got rid of the problem lease, if it works he makes some more cash.

 

[Sacha]

I'm a cynical grumpy old man at times and my cynical head says there is a chance that he has the lease on a property thats losing cash, so he offloads it to your "new" company. If it goes wrong he's got rid of the problem lease, if it works he makes some more cash.

I suspected this, and initially (when this proposal was made) I came to the conclusion that this could be the only logical reason, and refused.

However after further thought I was unsure whether he will be able to 'offload' the lease onto this new company (with me as managing director) without landlord consent. This is because, from my understanding, the leasehold is in his personal name, so if he defaulted on the rent the agents would seize their personal assets. If the landlord went to such measures surly he won't consent to the leasehold being acquired by a LTD company?

Furthermore as a shareholder and MD, in a hypothetical situation, if the company defaulted what would the risk be? I always thought that in a LTD company you can't lose anything beyond what you put in the company itself?

Therefore, I contacted said person again and said that I was considering the proposition again.

As attractive as it may seem, they being a previous success, why bring you into the fold? They can make their money (and have plenty of back up capitol) without out you involved.

Basically they own quite a few restaurants across England, and have been experiencing difficulties like every business. The restaurant in discussion has been closed for the last few weeks. They want to reopen said restaurant because they (I speculate) discovered that they would not be able to sell the restaurant for a tidy sum (once all the legal fees are settled) without it being a 'running concern'. Furthermore said restaurant was running at a loss.

You need to know how the property will be dealt with... it's a little confusing trying to understand why a millionaire will want to get involved, if he's not going to be involved!!!! does that make sense?

The individual who is proposing this has many restaurants, and our restaurant is quite far off from his company's other restaurants, so they want someone to run it in a semi-franchise fashion (I'm assuming). The differences being they aren't selling me a franchise I'm basically selling them one, and the place is on a loss.

I won't disclose the sum that I am being asked to put forward, but basically it's an expendable amount, worth the risk in terms of capital put forward, or are there hidden costs I am not aware of?

 

[oldeagleeye]

I was going to suggest a solicitor specialising in shareholders agreements and he is doing a special deal for UKBF members. Having looked at your post and the numbers again there is only one option for any sane person. Run like hell. Stay away and if in any doubt whatsoever be warned.

If as I suspect this offer came from another member of the same ethnic community don't fall into the trap of thinking they must be trustworthy. It ain't we Brit's that charge Asians a fortune to smuggle them into Britain and dump them in Calaise penniless and starving hungry. It is fellow Asians.

Robert

 

[Sacha]

I was going to suggest a solicitor specialising in shareholders agreements and he is doing a special deal for UKBF members. Having looked at your post and the numbers again there is only one option for any sane person. Run like hell. Stay away and if in any doubt whatsoever be warned.

If as I suspect this offer came from another member of the same ethnic community don't fall into the trap of thinking they must be trustworthy. It ain't we Brit's that charge Asians a fortune to smuggle them into Britain and dump them in Calaise penniless and starving hungry. It is fellow Asians.

Robert

But why, what do I have to lose if I go ahead besides my initial investment?

 

[oldeagleeye]

Your sanity. your hair. Months of frustration only to find that there is something dodgy about the lease and last but by no means least have the whole venture collapse around your ears and it will be your repuation that is damaged.

By the way. How much are you investing and what area are you in. PM me if you don't want to reveal in open forum I might be able to point you in the right direction to owning a restaraunt yourself.

Robert

 

[oldeagleeye]

Hi guys. I have recieved a couple of PM's from Sacha asking for my adivice after I asked him what his investment would actually amount to. I obviously don't want to reveal the figure but have advised the OP to reveal to the members on this thread because his posts so far I feel have been misleading and as we take things at face value your responses might have been otherwise different. I know mine was.

Mine now after getting the facts is - go for it because how can I put it. This is not so much an investment but more of a career opportunity where for the sake of commitment and a little hard work there could be a substantial reward in a years time.

Over to you Sacha.

Robert

 

[Chris Ashdown]

My question would be is the 50-60% gross profit big enough for a food outlet

Is the Millionair a real one or borrowed up to the hilt

 

[Lee Jones Jnr]

Sasha,
am I right thinking that you were the guy who was planning setting up a spectacular money spinning restaurant of some kind but struggling for £? Whatever happened to that?

 

[Sacha]

My question would be is the 50-60% gross profit big enough for a food outlet

Is the Millionair a real one or borrowed up to the hilt

Hi Chris,

He's a real millionaire.

What I know is this: he started in business young, eventually got into online courses in its infancy, sold and then moved onto petrol stations and other businesses (that I am unaware of). Apparently, he now has considerable property holdings. He was retired but decided to get into business again.

Basically, from what I understand, he started buying and consolidating hotels, restaurants and clubs into a single company with the intention of floating it. Unfortunately, the recession hit hard and he wasn't able to continue expanding. So he now owns a lot of restaurants, hotels and clubs - way too much to handle - and can only sell them for a loss. I think he is trying to weather the storm and sell or float once the economy picks up.

Concerning the profit margins on the food: they’re not exciting I agree.

But basically, what I was hoping to do was to simplify the menu - i.e. stop making speciality dishes and focus on pizza and pasta (very high quality by the way).

Yes, margins wouldn’t be amazing, but I would be able to handle double the amount of customers. Furthermore because prices would be reduced it would be accessible to a much wider market. Also side dishes, desserts and drinks would be making large margins.

My idea is to have a set price, either £7.95 or £9.95 (the latter would actually be more to the 75% GP), for a soup or a salad and a pasta or a pizza. One set price for everything on the menu.

On Friday and Saturdays I would be able to get over 200 customers consistently, easy.

Sunday to Thursday would be the challenge. Say I got 100 customers, spending on average £10 a-head, Sunday to Thursday I would be making serious money. This could be achieved by, for example, kids eat free on Sundays, student night on Thursdays, comedy or live music on a wednesday, free alcoholic drink on Tuesdays, etc.

Also we would start a takeaway and eventually delivery service that would compete directly with Dominos Pizza, but be significantly better quality, as well as offering hot, tasty pasta dishes (the same sort of thing as Pizza Hut but with a lot more variety as well as being on a completely different universe in terms of taste, texture, quality, authenticity, etc.).

Hi guys. I have recieved a couple of PM's from Sacha asking for my adivice after I asked him what his investment would actually amount to. I obviously don't want to reveal the figure but have advised the OP to reveal to the members on this thread because his posts so far I feel have been misleading and as we take things at face value your responses might have been otherwise different. I know mine was.

Mine now after getting the facts is - go for it because how can I put it. This is not so much an investment but more of a career opportunity where for the sake of commitment and a little hard work there could be a substantial reward in a years time.

Over to you Sacha.

Robert

What I told Robert is that the investment I am being asked to put in is nothing. This is why Robert changed advice and told me that he thinks it's worth the stress.

However, what I haven’t discussed with the potential partner is whether he would be putting money down himself as start up capital or whether we would be able to organise an overdraft.

If he won’t give me enough money to cover the first 3 months' overheads I don’t think I would be able to go ahead with it - well I know I won't. However, he probably will because he’s paying the rent every month as it is, so I’d take that off his back if he agrees to put collateral down, or use his contacts, to get us an overdraft or loan.

Sasha,
am I right thinking that you were the guy who was planning setting up a spectacular money spinning restaurant of some kind but struggling for £? Whatever happened to that?

Hi TTP,

Yes I am the same guy. That’s all still in the works. What's really exciting is that this opportunity would actually help further my concept in terms of experience, networking and the much needed cash (if I do this right).

What's your opinion on this whole thing?

P.S. My name is spelt with a C not an S.

 

[oldeagleeye]

Hi Sacha.

Hate to dampen your spirits mate but you really have to get a proper business plan together rather thn keep coming up with recipes and numbers plucked out of thin air. You say for example that you could get 200 customers every Friday & Saturday night. That number of bums on seats is diificult enough to achieve every week by a restaraunt with a great reputation.

This one I understand has been making a huge loss for some time and now closed.

Given that situation standards would have dropped and a poor reputation gained. What's more the whole place will probably need a complete makeover. This for instance is just of the modern restaraunts that you would be competing with and this is West End here we are talking about.

Uploaded with ImageShack.us


Full FOGO
A full selection of all our succulent meats and poultry, accompanied with an array freshly prepared salads, rice, chips, served in a set order Eat as much as you like.

The Cost. Only 17.95. LESS than £9 with a London restaraunt card. Valid at other 600 establishments within the M25.

This then is the bottom line Sacha. With even a modest makeover. Re-opening promotions. A fantastic menu and a 6 moth timeline to profit your talking about needing £25,000-£50,000 cash - even if you get free rent. Frankly I can't see the current owner throwing good money after bad and given the competition your not go.ing to raise it anywhere else.

Sorry mate but that is my view. Others may take a different one.

Regards Robert

NOTE. Re FOGO. I buy frozen Brazilian fillet steak from Lidl and it is fantastic compared to British so I am going to give Fogo's a try myself when I meet Tej in London hopefully in about 6 weeks. Let me know if any other members would like to join us. I am sure that would be OK with the old boy. BTW. They do offer a veggie menu too.

 

[Sacha]

Hi Sacha.

Hate to dampen your spirits mate but you really have to get a proper business plan together rather thn keep coming up with recipes and numbers plucked out of thin air. You say for example that you could get 200 customers every Friday & Saturday night. That number of bums on seats is diificult enough to achieve every week by a restaraunt with a great reputation.

This one I understand has been making a huge loss for some time and now closed.

Given that situation standards would have dropped and a poor reputation gained. What's more the whole place will probably need a complete makeover. This for instance is just of the modern restaraunts that you would be competing with and this is West End here we are talking about.

Hi again Robert,

Firstly there's absolutely no need to apologise, I welcome your insights and advice.

I know I should really write a business plan, and I probably will if the potential partner asks me to do so. The numbers and recipes I'm coming up with aren't plucked from the air: I know exactly how much each pizza and pasta dish will cost me to make, as well as exactly how to make them, how fast it will take to make them, how much the kitchen could handle and who would be the suppliers. Both the pizza and the pasta dishes were sold in the restaurant (I was managing it before it closed by the way), and they were the most popular items. The market research has already been done on what I want to sell.

The restaurant still has a very good reputation in the surrounding towns and cities. People are distraught that it is closed. The phone still rings with people wanting to book everyday. It was used extensively for parties, hen nights (because there are 3 tables that can sit over 15 people), and couples and families (because it has a really good atmosphere). Furthermore children love it.

The restaurant has been in business for over 13 years. The individual I am considering going into partnership with purchased it 3 years ago from the family who opened it. It used to take 13k a week 5 years ago, and prices were less expensive then as well (I have the books).

On the 200 customers every Friday and Saturday. The restaurant used to do slightly less than this before it closed. Average customers on a Friday and Saturday was between 130-180 customers - without fail. Bare in mind that prices started at £13.95.

I know this is probably hard to believe but standards didn't drop in the restaurant, nor did the reputation. The restaurant is a local landmark, everyone knows where it is and it has a reputation for good, fresh food. It's so well known that businesses next to us, that have actually been in business longer, use the restaurant to direct customers to their shop.

The main reason that the business started making a loss is because the individual in question didn't spend a single penny on marketing or in maintaining the building (i.e. painting, new equipment, etc.) in 3 years. So as competition increased the restaurant wasn't staying in people's mind. He knows that's the reason. Basically they struggled because they have so many other restaurants to manage, and when the recession hit they laid off all their area managers, marketing people, etc.

Concerning the need to makeover the restaurant: not necessarily. It has a really good kitchen with amazing equipment. The tables and chairs are all in good order. There are plenty of working fridges. The only thing it could use is a paintjob, I would need some more pizza plates and oven bake dishes, and possibly a fridge for the sweetroom. It could do with the bar being re-designed and the lighting changed to low-voltage but that isn't a necessity right now. The building is pretty much ready to go.

Uploaded with ImageShack.us


Full FOGO
A full selection of all our succulent meats and poultry, accompanied with an array freshly prepared salads, rice, chips, served in a set order Eat as much as you like.

The Cost. Only 17.95. LESS than £9 with a London restaraunt card. Valid at other 600 establishments within the M25.

This then is the bottom line Sacha. With even a modest makeover. Re-opening promotions. A fantastic menu and a 6 moth timeline to profit your talking about needing £25,000-£50,000 cash - even if you get free rent. Frankly I can't see the current owner throwing good money after bad and given the competition your not go.ing to raise it anywhere else.

Sorry mate but that is my view. Others may take a different one.

Regards Robert

NOTE. Re FOGO. I buy frozen Brazilian fillet steak from Lidl and it is fantastic compared to British so I am going to give Fogo's a try myself when I meet Tej in London hopefully in about 6 weeks. Let me know if any other members would like to join us. I am sure that would be OK with the old boy. BTW. They do offer a veggie menu too.

You're right I will need at least 20k. I'll see what he says anyway.

The thing is he is paying rent right now, without any income from the building. He won't be able to sell it quickly, or for a good price if it's closed. If he doesn't agree to put money down, well it's a bit stupid really because he won't exactly be saving it will he - that money will go anyway.

 

[oldeagleeye]

I don't think that you need any more advice Sacha. You have made up your mind but just one point that Chris mentioned. A 50/50 split between shareholders is fine (though your really should have control at least 51%) shareholders are different from working directors or managers however. You should insist then that you take a salary out of the business before calculating any profits. Either tht of you go 70 - 30 in your favour.

R

 

[Sacha]

Thanks a lot for your invaluable advice Rob, you have helped me clear my thoughts a lot.

A few questions for you though before you stop mentoring me haha.

How and when are the profits calculated? Is it quarterly or year or what?

What if I think all profits should go back into the business, would I be able to insist this (assuming we are 50-50).

If I did have 50% and was the MD would I have complete control over the business, how much I get payed, what happens to the profits, etc.?

Assuming the lease isn't moved to this new company. Would the new company need some sort of sublet agreement? What happens if he, as the leaseholder, falls out with me and there's no sublet agreement?

What risks are there besides the stress, loss of reputation, etc. if the business did default. Could there be any legal or financial repercussion on my personal name (obviously everything will be to the books but I mean anything that might happen even if everything is legal and accounted for).

What do you mean by I should draw a salary before the profits are calculated? Are you suggesting that when the profits are calculated, for example at the end of the year, that is when I draw my salary? Or do you mean I should demand a salary weekly/monthly?

Could I not give myself a bonus instead of a salary if things are going well?