Profit split between partners

[Mark.niceguy]

Dear forum members
Three of us (A,B,C)are starting a Supported living business involving substantial investment. We are all full time professionals.
Our capital investment is: A-50%, B-25%, C-25%
A will have primary responsibility to run the business. (Getting clients, contracts, recruiting, staffing, looking at finances etc). B and C are mostly silent partners.

My question is: How much share of profits should A get towards his extra contribution (i.e. sweat equity)?

Thanks
Mark

 

[Scalloway]

Is this a partnership or are you shareholders in a limited company?

 

[Mr D]

When you set up the partnership or made a partnership agreement, what percentages did you all agree to have? Based on capital investment? Time spent on the work? Mix of the two?

 

[Mark.niceguy]

When you set up the partnership or made a partnership agreement, what percentages did you all agree to have? Based on capital investment? Time spent on the work? Mix of the two?

We agreed on mix of two. We did not draw written partnership agreement (I wish we had) at the time of starting, but had verbally agreed on broad terms.

Unfortunately, at the time, it was not agreed as to how the extra payment will be made for the partner who would be spending more time or efforts in running the business. Now after some time into the partnership, it was felt that before taking things further, the profit sharing needs to be decided.

My proposed formula (borrowed from internet) was:

85% of profit to be divided as per shares i/e A- 50% of 85= 42.5%; B & C-25% of 85=21.25%

15% of profit to be distributed as per each partner's contribution in terms of ideas, time, energy, networking, etc.

Assuming that both B and C were to be fully silent partners, A would get full 15%

as per above formula, the total profit the partners should be getting would be:
A-42.5+15=57.5
B-21.25%
C-21.25%

However A is insisting that he must get total of 65% profit and is not willing to come to anything less that this. This I feel is unreasonable.

To break the deadlock, I even agreed for him to have 60% of profit. However, he is still not agreeing to it.

What should do? Should I walk away? or should I accept his unreasonable demands?
Incidentally, I have not put in any money as yet.

 

[Mark.niceguy]

Is this a partnership or are you shareholders in a limited company?

Shareholder in a limited company.

 

[MBE2017]

Shareholder in a limited company.

What does your company shareholders agreement state, resolving issues etc should have all been covered in your various articles drawn up at inception of the company.

Are you actually a shareholder? You state you have made zero investment as yet, so the other two have issued shares to you without any investment?

Lastly, why offer 60% to a 25% shareholder, do you think the other shareholder will be happy with their 60%? By my reckoning you will get less than zero, you will need to fund the other 20% of missing profits.

That said, shareholder A has not contributed anything apart from work as yet, so if you are taking a salary should you even get any profit share?

It is depressing to see yet another thread outlining a total lack of a proper shareholders agreement, if there was one in place you shouldn’t be asking this question.

 

[Ian J]

What does your company shareholders agreement state,?

It is depressing to see yet another thread outlining a total lack of a proper shareholders agreement, if there was one in place you shouldn’t be asking this question.

Haven't you answered your own question?

 

[Mr D]

We agreed on mix of two. We did not draw written partnership agreement (I wish we had) at the time of starting, but had verbally agreed on broad terms.

Unfortunately, at the time, it was not agreed as to how the extra payment will be made for the partner who would be spending more time or efforts in running the business. Now after some time into the partnership, it was felt that before taking things further, the profit sharing needs to be decided.

My proposed formula (borrowed from internet) was:

85% of profit to be divided as per shares i/e A- 50% of 85= 42.5%; B & C-25% of 85=21.25%

15% of profit to be distributed as per each partner's contribution in terms of ideas, time, energy, networking, etc.

Assuming that both B and C were to be fully silent partners, A would get full 15%

as per above formula, the total profit the partners should be getting would be:
A-42.5+15=57.5
B-21.25%
C-21.25%

However A is insisting that he must get total of 65% profit and is not willing to come to anything less that this. This I feel is unreasonable.

To break the deadlock, I even agreed for him to have 60% of profit. However, he is still not agreeing to it.

What should do? Should I walk away? or should I accept his unreasonable demands?
Incidentally, I have not put in any money as yet.

It sounds like walking away is a good idea.

For the work done in the business I'd be thinking wages and bonuses. For the investment I'd be thinking share percentage.

 

[SteveHa]

If this is a company and you are shareholders, and all shares are of the same class, then your share of profits is in accordance with your respective shareholdings (50/25/25). There's no alternative.

Separately, A may wish to negotiate a salary in respect of work done, but that isn't affected by the shareholdings.

 

[jamieclick]

If I were you, I would get all three fo you to read the book Profit First and then have a chat about it.

Implementing ProfitFirst in my business has been a total game changer and I'm sure it could help you guys come to a fair arrangement.

 

[Newchodge]

Can you explain why you think your proposal is reasonable and A's is unreasonable? They are doing all the work and have put in twice as much capital as you. All that effort, without which there would be no profit to distribute, is worth only 15%?

 

[The Byre]

a Supported living business

It might help if we knew what that means.

involving substantial investment

followed by -

I have not put in any money as yet.

So which is it?

But we read that the proposed share is -

Our capital investment is: A-50%, B-25%, C-25%

OK, that's nice and easy. A gets 50% of all profits. B & C get 25% of all profits each.

But then madness ensues -

We did not draw written partnership agreement

For people claiming to be professionals and therefore the beneficiaries of a tertiary education, that is a lamentable omission.

My proposed formula (borrowed from internet)

Borrowed from the Internet!!! Heavens-to-Betsy! What comes next? An eight-year-old as business advisor? Big Boys get proper professional advice, they don't go grubbing through the Interweb looking for the answers that suit them best (and they probably wouldn't understand anyway!)

But now we have the answer -

A would get full 15% as per above formula, the total profit the partners should be getting would be:
A-42.5+15=57.5
B-21.25%
C-21.25%

Ah-Ha! B & C have not understood the difference between profit and wages. Mr.A gets 15% of profit in lieu of wages. If we are to find out what the profitability of a company really is, we must exclude wages and that 15% must be regarded as a wage.

When calculating profit you MUST exclude wages, regardless of how they are calculated. A guy with a corner shop may claim to make £30k gross profit but then he often conveniently forgets to include a wage for himself. If we take away £25k for a wage, then we see that he is making just £5k profit.

Yes, we all know that is not what we tell HMRC, but when calculating the P&L of a company for our own judgments and valuations, that is what is supposed to happen. Profit is what is left AFTER you have taken off a suitable amount for wages.

And is that profit net or gross - and how are you defining gross and net? EBITDA, net income, what?

Now you see why a written shareholders' agreement that has terms approved by all investors and following the advice of a suitable business advisor and drafted by a lawyer who specialises in company law is not just important - it is an existential matter!

 

[Mark T Jones]

The Byre has pretty much covered it.

I'm wondering what answer you are looking for - one that suits you or one that is meaningful?

The latter will require a lot more hard information and significant detailed discussions. You can bet your bottom dollar that - as a mere mortal - your internet research has been skewed in your favour.

The obvious 'simple' answer is that each individual is remunerated (by salary, fees or whatever) for their time and effort, whilst dividends are paid on shares allocated on equity. Though there are still several uncovered variables..

 

[Millerd]

Separate the issues. As a shareholder (if that relates to the capital investment), you get a share of the profits in relation to the shareholdings. If A works in the company then they should be paid a market-related salary - that should cover all their 15%

partner's contribution in terms of ideas, time, energy, networking, etc

. If B and C do any "work" they should be remunerated based on the value of this "work" and not merely a % of the profit.
It may also be a good opportunity to resolve these issues and sort out a shareholders agreement.