How to compensate partner for product he brings to the business?
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  1. #1
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    Default How to compensate partner for product he brings to the business?

    Setting: Partner A and B went together on purchasing an existing manufacturing business building steel products. Partner A had some cash and experience in the exact product but no shop, Partner B had shop and some equipment but no cash. Purchase was made which included fair line of metalworking and fabrication equipment. Partner B had numerous enterprises none of which made a complete living, hence the motivation to pursue joint effort with A. One of the enterprises being metal fab.

    After forming LLC and actually getting this thing rolling one of Partner B's customer wants another of Partner B's products. It has been agreed on that Partner B may service his own enterprises separately and on his own time. However, this project will be done by both of us in the shop and work on LLC's product will stop while this one get's built.

    Question: Should Partner B run this separately, buy his own materials and simply pay the LLC for shop time? (His benefit, he keeps any profit)
    Or: Should it be done by the LLC. LLC purchase materials and keep profits. This benefit me essentially as Partner A. However, seems simpler for the books and billing.
    Leaning toward second option, which brings the question: Since he designed the product, has blueprints already, etc, what is that worth? Is there a common percentage of royalty that should get paid?

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    This scenario happened to 2 family members in business together. It caused a lot of hard feelings and contributed to the demise of the business. Partner b ran this in the shared shop as his own entity and partner a always accused him of stealing company materials and time. In hindsight, I think the best solution would have been to make this part of the shared business and pay partner b a royalty based on the profit margin. Then, both partners would be working together to produce this product as they would both profit from it.

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    My opinion on a partnerhip is that it is a partnership and everything is shared, work, income, debt etc. If it is not shared exactly equal that's up to the parties involved but it should be hammered out up-front or it will only cause problems down the line.

    My recommendation in a situation like this is allocate "x" amount of time and money to this enterprise in order to pursue it and move it forward while not letting the rest of the business fall by the wayside. That way, time will reveal what is the proper direction to pursue. To be hasty upfront will likely cause a lag downstream.

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    The best thing to do is not have a partnership

    The second best thing is to document all time and materials in invoices and 'bill' the partner for their use. One need not actually have any money transferred

    I think this is a poor way to have a 'partnership' where one party has things that are held out

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    Quote Originally Posted by gustafson View Post
    The best thing to do is not have a partnership
    ^^^That, right there...

    The second best thing is to document all time and materials in invoices and 'bill' the partner for their use. One need not actually have any money transferred

    I think this is a poor way to have a 'partnership' where one party has things that are held out
    Where does it stop.. You brought what you had to the table, he brought what he had to the table..
    If you brought a customer with you, do you get extra money running their jobs??? Do you have
    to pay him a royalty for using one of 'his' screw drivers...

    This should have been all hashed out ahead of time, and should have been written down, signed
    sealed and stamped... all legal like, with the help of a lawyer to make sure its all legal and
    worded properly..

    A few hours of a lawyers time BEFORE you go in business is a lot cheaper than a lot of lawyers
    hours later on down the road... And guess how I know that???

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    Even if both partners get along and everything is good, all it takes is one of the partners getting a divorce to ruin everything.

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    How about partner B's other enterprise sub-contracts it to LLC? He can provide matl or not. LLC makes the job and bills partner B's enterprise. Partner B's enterprise bills customer.

    That way everything is above-board and both make some money.

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    If the business is stable, get an attorney and break the partnership. That is the best thing you can do for each other.

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    Quote Originally Posted by Booze Daily View Post
    How about partner B's other enterprise sub-contracts it to LLC? He can provide matl or not. LLC makes the job and bills partner B's enterprise. Partner B's enterprise bills customer.

    That way everything is above-board and both make some money.
    There could be positive tax advantages to that, too. Include your accountant in the discussions. Plus it makes things easier if new product doesn't fly.

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    A partnership is a marriage of convenience. Sooner or later it is no longer convenient for one of the partners. It's an expensive divorce.

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    Quote Originally Posted by Oldwrench View Post
    A partnership is a marriage of convenience. Sooner or later it is no longer convenient for one of the partners. It's an expensive divorce.
    No,I do not agree with that. It is a very very expensive divorce as I well know.

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    This is the perfect storm that people going in to a partnership never ever forsee, predict, or fathom.
    I am firmly planted with deep roots in the no-partnerships side.

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    So B had multiple "businesses", the sum of which couldn't make him a living as evidenced by the fact that he had no cash. Correct?

    A brings money and relevant knowledge to the partnership while B brings a shop but retains his "knowledge" in that he isn't willing to contribute previous work. Instead, he retains his previous work from his past less than successful ventures so they can be manufactured by the partnership and provide him some gravy above and beyond the income from the partnership. Correct?

    And not only is the current project to provide him gravy, but its necessary to shut down the current business for the duration to pursue this gravy for B. Correct?

    Question for A..... Were you required to bring your own Vaseline to this so-called partnership?

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    You answered the question in the second paragraph. He should do it on his own time or it gets run through the llc just like anyother job. Even more so that it is stopping all other jobs in process. That is directly taking back out of your pocket what should be there in that time frame. Maybe a 60/40 since it is " his " product. Maybe. And just curious how much "product" and how much time. You talking a onesy twosy thing for a few days or weeks worth of time .

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    Only 15 more payments to go and I'll be free of the worst business decision I ever made. I still love the person but I'm so happy that I'm no longer in a partnership.

    Run now if you still have time.

    Make Chips Boys !

    Ron

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    Completely depends on the partners and their relationship.

    I started with a very bad decision to have a partner and it was expensive in every way (for me) to go our separate ways.

    Then I hired one of my college roommates - after a couple of years of watching him work harder and more competently than anyone else I had ever met, I made him a partner and he has been the best possible partner anyone could wish for for over 20 years.

    In the scenario above - a partnership involves giving of everything to the deal including good will / prior customers / you name it. The key is that both partners should be giving something of relatively high value that when put together make something of higher value than the sum of the two individual values.

    He can't make his product without your resources at present (i.e. he would have to go out and find them elsewhere which doesn't sound probable).

    Certainly you could work out extra compensation based on profitability of the product being sold - nothing wrong with that. But you both have to feel like this is the right thing to do - if you can't figure this out, it will be cheaper to separate now than after some duration of time when the value of the business climbs any appreciable amount.

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    I was worried this would turn into an anti partnership debate. That is not the point here. Its been done. Yes, I have read some of the horror stories here on PM. It was a case of an opportunity that I had been looking for and I would have had to pass it up without the help of said partner. Currently it is just the two of us with no employees so we both have equal skin in the game. Sure I would have preferred to make it work alone but looking back it would have been a super tough road as I would have had to hire help from the start.
    I do appreciate the input. It really isn't a frequent happening.

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    Without knowing enough about the two partners strengths, weaknesses, etc, the better idea would be to try to foresee where resentment could/would/should build from. What small thing will derail this project and destroy the partnership? If you can foresee where the seeds of resentment might grow from, then maybe you can write rules to prevent or solve the small problems when they arise.

    That is why people hire lawyers: they are far more familiar with foreseeing the rules, and constructing explicit language to keep the balance right between the partners. Non-expert partners don't know what they don't know and they will screw up, but be wiser afterwards, perhaps. But each partner must know what they want, honestly, when the rules are being written.

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    I don't get this "on your own time" thing - is he not working in the business? When you have a business, all your time and attention is on the business. For example, any executive employment contract will have language about that job being the only thing that person does. Its not suppose to be part time for buck-stops-here guy..

    I suppose the point is if you are both working in the business, and one is already defining as 'their own time", that might be trouble. You're going to be there all night making sure a deadline is met, but he gets to call it "his time" after say 5 O'clock and work on another business?

    I've had two great business partnerships and two litigious nightmares . There's the obvious cliches (which are true): good communication, good fences make good neighbors etc. However really where the wheels fall of the cart on partnerships is your interests, on pretty much anything, are no longer parallel. Once they are diverging, even on a small thing, its where the trouble starts; conflicted interests. Aside from having a really good person (ethical and a person of integrity) as your partner, you both need to constantly make sure those interests are parallel. Probably true of all of life's partnerships

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    Anything done on his time is his...simple enough.

    Anything that involves ANY part of the buisiness is the company.

    Look up "any"...

    So if you are helping him do "off books work then consider he will need to do similar off books work for you...like a comp time system. But that gets messy and the tax man as well as accounting does not work.

    You should know the shop OCPH or operating cost per headcount hour and whatever that is needs to be paid into the shop for whatever time is used by anyone.

    That would be "working at cost".

    It keeps the books correct and is fair to all parties since the company is recovering cost of operations.

    If active work is set aside then "full retail" must be considered as a paying client is being impacted as well as your bottom line and future work.

    Sent from my SAMSUNG-SGH-I337Z using Tapatalk


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