Business advice

[pletal]

This may not be the place to post this but always get great advice and some FI folks may have dealt with this. This week I have a meeting to finalize a new company with three other partners. I would be the financial backer at least for the first year. I have always believed (and comments would be great) that if you can't handle your personal finances your business financial decisions may be made out of the need for money instead of a good business decision. Should I ask for a personal financial statement from these future partners before committing? One of the partners filed bankruptcy at least once. Don't believe in it unless for medical reasons, seems to be the easy way out. Thanks in advance.

 

[phil1ben]

I had my own business for 30 years. Recently sold it and retired about 1 year ago. I am always leery of a business opportunity involving partners where the others do not have skin in the game. Certainly they will claim they are contributing knowledge, experience or contacts but that is not the same as cash. If the idea was that foolproof then you must ask "why they are coming to you for money". Why not a bank, VC capital or some other individual. Not looking to be negative just pointing out that you must answer that question. If your partners are relatives or close friends it adds a whole new dynamic to the equation.

I would not only ask for financials (which if not prepared by and signed by a CPA are virtually worthless) but the last 5 years of tax returns also certified as true and correct. It is always easy to find a reason NOT to do something. However, if you think it has chance for success go in positively but with as much knowledge as you can garner. No one ever wants to look back on a bad situation and determine that it could have been avoided had I asked, done or demanded this or that.

If you form an LLC and the partner who filed for bankruptcy files again his creditors may be able to levy on the profits from his interest. Or if one of the partners files for divorce his spouses' attorney has the right to view the books to value that partners interest. Simply stated their personal finances and circumstances could definitely affect you and your investment.

I never give advice unless it is solicited and you asked.

Good luck.

 

[nhcycling]

I had my own business for 30 years. Recently sold it and retired about 1 year ago. I am always leery of a business opportunity involving partners where the others do not have skin in the game. Certainly they will claim they are contributing knowledge, experience or contacts but that is not the same as cash. If the idea was that foolproof then you must ask "why they are coming to you for money". Why not a bank, VC capital or some other individual. Not looking to be negative just pointing out that you must answer that question. If your partners are relatives or close friends it adds a whole new dynamic to the equation.

I would not only ask for financials (which if not prepared by and signed by a CPA are virtually worthless) but the last 5 years of tax returns also certified as true and correct. It is always easy to find a reason NOT to do something. However, if you think it has chance for success go in positively but with as much knowledge as you can garner. No one ever wants to look back on a bad situation and determine that it could have been avoided had I asked, done or demanded this or that.

If you form an LLC and the partner who filed for bankruptcy files again his creditors may be able to levy on the profits from his interest. Or if one of the partners files for divorce his spouses' attorney has the right to view the books to value that partners interest. Simply stated their personal finances and circumstances could definitely affect you and your investment.

I never give advice unless it is solicited and you asked.

Good luck.

+1

 

[Texas Proud]

It sounds like you do not know these people... that to me is a big red flag...


What are they contributing to the new entity? Who is in control of YOUR money? What prevents them from wanting more money in a short amount of time? How much say do you have going forward?


And last is what happens if the brain of the company leaves? IOW, there is usually one guy who is the driving force and the company lives or dies on him.... this question also includes the 'what happens if you get hit by a bus' possibility...


But yes, I would demand personal financial statements.....

 

[Ronstar]

Yes- get financial statements. If the partners have no skin in the game, I would want 100% of the stock. And keep 100% of the profit disbursements until they pony up some cash. Until then, give them a salary plus bonus based on profitability. I would be wary of being in business where I had partners but I was 100% responsible for the financial strength of the company.

 

[OldShooter]

It sounds like you do not know these people... that to me is a big red flag.....

+1

and a bankruptcy??! Bail out now.

 

[kcowan]

In addition to their last five IRS submissions, get every partner to sign up for liability of 100% of the financial debt. i.e. unlimited liability

 

[target2019]

This may not be the place to post this but always get great advice and some FI folks may have dealt with this. This week I have a meeting to finalize a new company with three other partners. I would be the financial backer at least for the first year. I have always believed (and comments would be great) that if you can't handle your personal finances your business financial decisions may be made out of the need for money instead of a good business decision. Should I ask for a personal financial statement from these future partners before committing? One of the partners filed bankruptcy at least once. Don't believe in it unless for medical reasons, seems to be the easy way out. Thanks in advance.

This is just my observations from a long time supporting small business (and megacorp/minicorp). No matter the number of partners, it was something I always felt was too complex for my introverted behavior. Everything ends someday, and it must be very complex to get out of a 4-person partnership.
This past Feb-Apr, I spent a lot of time listening to CPAs discuss many entities like this, around tax time, and it takes years to bring certain relationships to an end. Messy is an understatement.
That's just me talking. There's a lot of due diligence to be done.

 

[OldShooter]

... I would be the financial backer at least for the first year. ...

Thinking more about this makes me more certain that you should just bail. Consider some cases:

1) This is a significant amount of money for you and if it goes off the tracks it will hurt. So --- bail.

2) This is not a significant amount of money for you and if it goes off the tracks the grief and risk is not worth the small amount of potential profit. So --- bail.

3) This company has huge potential, you can afford the risk in order to be a principal in the next Amazon. Sit down. Take a deep breath. Consider the odds against this happening. bail.
​

If you are still resisting bailing, have your attorney run full background checks on your potential partners and any of their previous businesses. Leins, judgments, etc. for sure. If anything looks at all stinky or even slightly suspicious --- bail

If you are still resisting bailing, take the business plan -- marketing and financials to a disinterested third party for a detailed review. Try https://www.score.org/ or your CPA. If there is no written business plan with financial detail --- bail.

If you are still in the deal, take the participation agreement, the buy/sell agreement, the indemnification agreement, and any other agreements to your attorney for review. If these agreements do not exist or cannot be made acceptable--- bail.

One of the cute little risks you face is joint and several liability for employee tax withholdings that are due to our uncle but not paid. This is a very common occurrence in a failing business where cash flow is a problem. ("We'll send it next week.") To collect, the IRS goes straight through the corporate shell and pursues the business owners for the money. "Joint and several" means that they can go after whichever of the owners appears to have the most money. IOW, you.

 

[RonBoyd]

and a bankruptcy??! Bail out now.

I would not look at that way. What was the circumstance behind the failure... what was learned? After all, one of the (if not only) most important traits of an entrepreneur is pushing the envelope. Remember Edison made 1,000 unsuccessful attempts before inventing the lightbulb.

Now having said that, I agree with all the above advice about getting to know your partners before jumping in. This will be your only opportunity to do it right. What is it they say? Some messes you get in just by showing up.

 

[OldShooter]

I would not look at that way. What was the circumstance behind the failure... what was learned? After all, one of the (if not only) most important traits of an entrepreneur is pushing the envelope. Remember Edison made 1,000 unsuccessful attempts before inventing the lightbulb.

Certainly some small fraction of bankruptcies are "meritorious" as you point out. But for the OP to be dealing with one of those few is not likely. He should not be taking the risk even if the partner has a nice story to go with the bankruptcy. The most successful swindlers have the nicest stories. Hence, background checks and liens and judgment searches.

Some messes you get in just by showing up.

Great line!

 

[pb4uski]

Just remember the golden rule... he who has the gold makes the rules... since you would be fronting the money make the rules so you are protected... if they don't like it they can go find another backer. And needless to say, don't even think about betting more than you can afford to lose.

 

[bigcmagor]

A friend made a fortune ($15mm) in the twin cities market, sold his business 15 years ago and moved to Florida. He invested his proceeds with two other partners in real estate ventures. They hit turbulent waters in the financial crisis and his partners both went bust. Being the only one with any money left, he had to take on the whole thing to preserve what he had invested, which was most of his money. He managed to preserve one commercial property and is living off the rent proceeds of about $100k per year.


By all accounts, he was set for life. Now he is afraid he will run out of money before running out of time.

 

[Texas Proud]

One other thought.... make sure you get paid back your investment before any of the other partners get anything except salary...


Any working partner should be paid a salary for the work they do... but since they do not have any money in they should not get money out over that salary until you are made whole... with interest...


If they are unwilling to do so, as others have said... bail...




Edit to add... I would also put some language in that if there is financial problems etc. and you are not paid back in a reasonable timeframe then you can have 100% ownership... no reason for them to keep ownership if the SHTF and you have to deal with it... and if it goes belly up you might as well get all the tax benefits of the loss...

 

[FI_by_2023]

Lots of good advice provided / get to know how investors more than financially- references and family.

Regarding guarantees, if you have provided any PGs in business and proceed, change yours to limited.

If they are not investing capital, consider carry back / seller financing at 15%. They cannot obtain capital, you need to be compensated for risk.

 

[CaliKid]

Partners that you don't know REALLY well? I wouldn't do it.

I should add unless your total economic exposure is minimal. However, that's doubtful if there are 4 partners.

Also I would have a sophisticated business attorney, who represents YOU only, draw up the documents.

 

[Scuba]

I agree with the advice in this thread. A good friend of mine got into a “partnership” with someone who contributed no capital, only expertise. She fronted all of the money. The business didn’t work out and her “partner” bailed on her, leaving her with several properties that she had to dispose of at distressed prices. She didn’t have to file BK, but had foreclosures on her credit for 7 years and lost a significant part of her retirement savings.

 

[ncbill]

Or they put up money but won't do anything else.

Had a relative who had 3 other partners like the above in a profitable business, but he forced a sale after he got tired of doing all the work for 1/4 of the profit.

 

[ivinsfan]

OP are you still here?

How do you know these people? Are they strangers, former co-workers, friends, family?

We farm and it's very common to see multiple units of one family working together. We have a C corp with my DH youngest brother and wife.

For every 10 of these it seems you have one of two that go wonderfully and improve everyones life..it has for us, after 40 plus I can say it was a complete success.

You have a few in the middle that do ok eventually breaking up due to money or lifestyle issues.

And at least 2 or 3 that implode spectacularly that end up with lifetime family estrangements or in front of a judge.


Are you 100% ok with losing this money and/or never having contact with these people again? If not I'd pull the plug now.

When I've seen the family farm unit blowup it's not actually do to low crop prices or bad crops conditions. It's usually because they don't agree how and what to spend money on, they get married and the spouse is not on board with the farming lifestyle, or the partners can't agree on a work schedule leaving work undone or one person royally hacked off about doing most of the work.