How many partners

I have been working on my business plan, which is giving me a clearer picture of what to expect. During this process there has been a nagging question in the back of my head, which is now in the front. Is 3 partners too many for a delco with projections: lowest 200,000( 1rst year) to 500,000 (6th year).

My brother-in-law and his business partner are fronting money and I am basically doing everything else. 1/3 owners.

I am a splicing tech. for major phone comp… Straight pay roughly 50K. O.T. another 25 to 35K annual.

Wife would oversee pizzeria while I’m at work and I after work with employees. We have 2 kids ( 9 and 11 ).

I have been waiting to do this for 10 years and it kills me to think this might not be worth doing all this for 1/3 of net profits.

Any experiences or feed back please.

Whoever is doing the actual work to run the place should be paid a market wage for doing that work BEFORE the profit is split up.

If you are going to split the proft exactly by ownership, the structure you want is an S-corp not a partnership. The “manager” takes W-2 wages for that work and the profit is split by ownership with no FICA due on those payments.

If the intent is to split profit other than by ownership in order to recognize the work of the “management” you will want to use an LLC as that allows that type of payout arrangement. Disadvantage is that FICA will be due on all of it increasing the tax burden.

Either way, you will want to create an entity to own it to protect your personal assets from liability related to the Delco. An LLC and an S-Corp provide identical liability protection. A partnership does NOT provide that protection.

A local competitor who opened less than a year ago has already had a partnership split (really breaks my heart) and while I don’t know the details, I suspect that they did not include buyout/break up provisions, as the one who walked out fronted the money, and the one still there didn’t.

I suspect part of the problem is that the store didn’t produce the financial windfall they expected, and for this reason it is important that all partners have a realistic view of what the return on investment will be.

Unfufilled expectations produce great feelings of disillusionment.

I’ve never had a partnership (except for my marriage of 17 years) but I’m told they can be tricky and have the potential to damage relations, sometimes permanently. I’d be a bit nervous doing it with a family member.

It would be worth paying a lawyer to draw up a detailed agreement to include duties, obligations, buyout provisions, escape clause, etc. in addition to incorporating.

As the owner/operator, I would not want to give up majority control and ultimately, decision making to investors (although I would certainly solicit and value their advice).

I think you need to plan for the worst in this scenerio, and do your best to make sure it doesn’t happen. The extra $$ you may pay to a lawyer at the beginning is a drop in the bucket compared to what this could cost you in terms of money and relationships down the road.

Everyone must be on the same page up front and a good lawyer will help you do this!

As the great poet Cyndi Lauper once sang, “Money Changes Everything”. (No, I’'m not a C.L. fan but I remember the song!)

I have a (silent) partner and I have not taken any type of pay since we opened and that 100 + hours a week without a day off. So at least you don’t have it that bad. He pretty much lets me make the decisions (with complete evaluation first of course) but it is tough because he only sees the numbers and not the experience/reality. Plus he’s never been in the restaurant business before, let alone pizza.

Have you invested anything monetary? Or just sweat equity?

As long as everyone understands the game, it should play out fine. A hot running shop of that size would hit maybe 15% net profit on Gross, IIRC. That means $30,000 to 75,000, based on your sales projection above, to split three ways after all is said and done. That is if everything is tight and efficient.

If that is realistic and acceptable, then you are on your way. That means you would be making your salary PLUS the divided profit. Taking away 100% of the profit the first year or two may be counter-productive. Reinvestment will pay off large in coming years. Market, market, market. Then market some more.

Ditto that partnership agreement thing. And the business structure importance.

Thanks for info. Looking for lease to open in february.

Bobegahwy - What would market wage be? Is it 8% Gross ( I dug Cyndi Lauper. She just wanted to have fun )

Steveo - no monetary( except for my own lawyer. advice taken). Not on duty sweat yet, but this business plan is giving me headaches, nervousness, and anxiousness. Steveo, I hope you get to a point where you can have some time off.

Nick - read alot of your stuff, Thanks.

Pizzachop - The family thing is a concern. CYA seems to be the theme for all concerned. I’ll keep my eyes open for alternatives. First I got to finish this dang business plan.

A market wage is what you would have to pay someone you hired to run the place. That is going to vary from place to place. My GM costs me about 6.5% of sales but in the past I have paid as much as 8%. The amount paid is a wage and bonus, not a percentage.

The point is that the compensation for wearing the apron is not related to the return on investment for putting up the cash.

partners are for dancing only. your first thought is the truth and everthing after that is what you want it to be.
money changes everthing

Well first off, know that any comments I make are just to get you thinking, that is all. I also think since I am a woman my perspective is a bit different from the other posters so far.

I agree with all the other posters as far as getting every morsel in writing. But the reality is even when you have it in writing…as clear as day…everyone’s perception of the agreement will be different.

I also want to challenge the amount of partners you have…you say three…I say it is more like more like six. We know from your post you are married and of course your brother in law is married. And perhaps the 3rd guy is married. Regardless of what you may believe every member of every family is a partner. Each family member is effected by this business adventure.

Right now you are making a nice salary of 50 plus overtime. Well kiss the over time goodbye. And from what you have stated is this has been a dream for 10 years. Since you are not financially backing this deal my guess is you somewhat live paycheck to paycheck. You need your income to support your family. I say this because when we dream of doing something for ten years one would assume over 10 years if we were able we would save and save like crazy to make it happen and not have a need for a financial partner or two.

There are several reasons I am posting the above:

First off, seems easy enough to go to work and when you get off go to the pizza place. But think long term, day after day after day. What kind of impact will that have on your growing children and wife? (AKA partners) What about the little league games, family holidays, outings, birthdays, anniversaries etc. What is the real cost there?
Have you and your wife truly discussed her taking care of the kids all the time for quite some time…is the reality of that decision there?

I only say this because in reality today over 50% of the marriages end in divorce. So the likelihood of either your partners or you divorcing is pretty high. How will that work with your brother in law? Can your marriage truly sustain through you working doubles every single day? A marriage takes work. Since you will already be working a full time job during the day and a full time job at the pizza place when will you have time to invest in your marriage? You may say our marriage is strong, it is only temporary…I challenge that… like any investment if you don’t take care of it you will lose.

Sure we think…well I can hire a manager…but you already have 3 hands in the cookie jar…so I think it will be sometime before you are able to hire a manager.

My husband and I are partners and I think over the last 14 years in the biz it has consumed us…after opening our 2nd location it has become our life. I could have never ever imagined how much work could take over our life.
My daughter is a junior and we have had our place since she was 2. It brings tears to my eyes thinking back to her kindergarten graduation and us flipping a coin to see who would attend, or the nights I had to take videos of her dances so hubby could feel like he was there, or the football games we couldn’t go to and watch her perform, the nights eating dinner on the couch because eating at the table just didn’t make sense, the 10 years we never handed out halloween candy because one of us was at work and one was taking her trick or treating, the rare hurry up 2 day vacations we have had. The endless invitations from friends to go to dinner and we couldn’t…together…the extended family birthday’s we had to miss. The family weddings only one of us could attend.

Don’t get me wrong, I have loved the biz all these years, but now as my daughter is almost graduated it saddens me like crazy to think of what we missed. We have had managers through the years but there was always something. I am just telling you all this so you and your wife can ask yourselves if it is worth it. You may not think it will happen to you…and it may not…but if someone had asked me I would have never believed it.

Knowing what I know now my advice to you is…wait. Save for 10 years, get completely out of debt and enjoy your life. If you still want to do it then you can do it with your wife as your partner.

Like I said I am a woman…we deal in terms of relationships…men think in terms of facts. You and your wife need to think long and hard about the life you have now and what you are trying to accomplish by opening this place.

Kris

Great post Kris, makes me appreciate the way I have done things. Family First!

Excellent post, Kris. Spot on.

Pizza Dreamer,
Take this lady’s advise ! I also live in Valley and have long wanted wanted to open a pizzeria. In my estimation the Valley is satuaratued with Pizza restaurants (perhaps because of the New York City migration out here) . Don’t give up your life for $10,000 a year (or likely less), instead buy yourself an outdoor brick oven, 50 lb bag of All Trumps, case of Full Red, case of Grande and throw a big neighborhood and family party. If you make great pie, you’ll get a lot smiles and compliments. That’s what I do…My father law, originally from Brooklyn, says I make the best pizza he’s had since he lived there. Get your kids in the act too…they will love it !

I also know the Valley a little too well.

DON’T DO IT! This market is incredibly too saturated. There are 20 pizza shops within 10 miles of ours.

If you can’t be the absolute BEST at everything, you don’t stand a chance. Your product has to be perfect, your service has to be perfect, and you have to have the capital to market the pants off of your competitors.

That being said, there are less saturated areas north and west of the valley, but with far less income and population.

Trust me, don’t walk away from your paycheck, and don’t depend on your wife to be there open to close, it won’t last long.

I’m afraid Kris did a pretty good job of summing it up.

You can’t know how much will be required of you, your family, etc. until you get into it. And once you’re in, it’s tough to get out.

There’s a reason why used restaurant equipment is so cheap.

3 partners is 2 to many. I had 2 partners bought them both out with in 2 years. Cost to much money and time. Do it right from the beginning,open with no partners.If you can’t wait till you can.What

I want to give my family a better life. Provide as much as I can for them. I thought starting a business would do that. Funny, writting and researching this business plan would give me the key. I’m seeing the pizzeria unfold on paper. Concerns started to rear its ugly head, in the process. The partnership was one. I kept on thinking how could this work with so many hands in the pot. Projections tell you alot. The other major concern was one that was right in front of me, but I just wasn’t clear on what it was, until now. I’ll sit down with the wife and talk about things. I really do want it to work, but if it doesn’t look like it will, we’ll try again later. Family first.

Kris - Thanks for keeping it real.

INHMAO, silent partners are investors, seeking adequate return on their investment, not subject to “profits” w/o “working the business”…

they s/b thinking a ROI of x or y % and loan payback…for instance - a “loan” in the amount of 100K w/a 8% interest only payment (better return than bank CD or many others) w/a principal payback in x or y years - that could be converted to actual stock in the business after 5 or 10 yrs…

Loan:

  1. Is expected to be paid back regardless of the success or failure of the business.

  2. Lender has no say in the business.

  3. The rate of return is defined.

Investment:

  1. The amount invested is AT RISK. If the business fails, some or all of the money is lost.

  2. The investor has a say in the business in proportion to ownership. If they own more than half, what they say goes.

  3. The return depends on the success. The assumption is that the return may be higher than a loan would be due to the risk that there may be no return at all.

It is VERY important that everyone understand which of these scenarios is the one you are doing. A common mistake is that the person putting the money in expects its return no matter what while other parties think that it is invested and at risk.

A typical LOAN in a situation like this might be at 8% or even lower from family. Interest rates of 10% are not uncommon either.

On an INVESTMENT, I would be looking for a much higher rate of return. I would want to believe that I could get 20% eventually to make an investment in someone else’s business. Family makes it different, but the need to have it all spelled out is the same.

DO NOT TAKE FAMILY MONEY FROM PEOPLE WHO CAN NOT AFFORD TO LOOSE IT!!

I have decided not to go into the pizza business. Although I’m new to commenting on this site I’ve been watching it for Quite awhile. PMQ is packed full of info for anyone looking to start or thinking of opening a pizzeria. For those of you from PT and PMQ, Thank You very much for all your insights and true to life comments.

For any NEWBIE looking or thinking of starting a pizzeria DO A BUSINESS PLAN. See your business on paper or your likely to see it crumble. SCORE was a great starting point. Your already at the next step, here.

GOD bless and GOOD luck to all of you.

P.S. - The wife and I decided to seak another business opportunity. One with alot less time needed. This one is her idea. I would tell you what it is, but the Valley has eyes. LOL

                                                                                 Sincerely,
                                                                                       JUST A DREAMER