You are here:

Negotiating Business Deals/Should I pay a dividend?

Advertisement


Question
Jacob-

Thanks in advance for reading.

I am about to raise seed capital for my business.
The first round will be a convertible offering while the second will be straight equity.
The former will be offered at about a 15% discount to the latter.

That said, I will be raising money from friends and family and would like to offer some method for them to recoup their initial investement.

I was thinking about putting aside (for example) 5% of net profits, starting in year two, to be used as a dividend to our investors.

Does this make sense? Do you have any other creative ways for me to help “sweeten” the above deal by offering some form of profit sharing/payout starting in year two?

Answer
Dear Avi,

There are many ways you can arrange payout to investors. You just have to keep in mind that year two might be still pretty cash deficient, therefore paying out dividends can suffocate your cash flow. I wouldn't suggest to start paying out not earlier than after 3 years. I would also suggest to discuss with your accountant the most tax-efficient way of profit-sharing; dividends may not be the best one. Talk to your accountant first; his opinion is critically important.

Negotiating Business Deals

All Answers


Answers by Expert:


Ask Experts

Volunteer


Jacob Berenfeld

Expertise

Selling a small business, buying a small business, preparing business for sale, small business appraisal (valuation), exit strategy planning, business coaching.

Experience

I am a business broker with over ten years of experience helping small business owners to sell their businesses. I am a small business owner myself, managing partner with Global Business Group - California business brokerage firm.

Organizations
BIR Business Brokers Network

Publications
You can see my articles at Small Business Blog, http://www.gbgusa.com/small-business-blog.html. You can also read my discussions and answers on www.linkedin.com.

Education/Credentials
MS in Electronics, licensed California business broker.

©2016 About.com. All rights reserved.