Expert: Michael N. Brette,J.D. - 10/28/2009

Question
Hi,

My husband and I have our own small business and are looking to expand. Someone else in our industry, not a friend more of an acquaintance, offered to finance the deal as a silent partner, asking one third of our profits. We will be making around $200,000 a year. Is this a fair request? Also, we ultimately want to own the business down the line when we have money, what kind of things should be in our contract?  We don't know anything about partnership and I am very apprehensive but we really want to do this, we just don't have the money. The cost of this business is $275,000.  Thank you for any advice.

Answer
Thank you for the question. First, get a good business attorney to assist you in set up this business arrangement. I would stay away from any partnerships. Do business as a LLC or "C" corporation. Issue shares of stocks to investors ( making sure to follow all state & federal security laws)giving them a percentage of ownership in your venture. Always keep voting control and do not add investors to your checking account.

You can have as part of your agreement a clause that allows you to buyout the investors at a market price to be determined by a professional third party appraiser.

Giving up a third of your profits might work to your advantage in the begining because you might not have any profits for several years. In this case your investors will not be entitled to receive anything. However, lets say 5 years down the line you might be generating alot of cash flow and making a profit which could be expensive financing. Never give up a percentage of the gross revenue. This will put you out of business.

Going into business has manny advantages but if not structured correctly in the begining will cause you alot of truble. Get everything in writing. Get professional assistance.