property and business investment

Do they happen to have a single daughter?

Sorry cant offer any advice here.

Are those hills getting closer yet?

But seriously, how is the deal to be structured? Have they secured finance? What is their experience with regards to brewing ie none/little or are they going to employ the expertise to run the brewery? What are the costs for the fitout & are you paying your share? The list gets longer….. How about going in as a secured creditor ie offer finance @ x% for the property loan or if the thing stacks up, then purchase the building and structure a lease for them (including % rent possibly) or consider a roulette clause on the property (as a mutual escape clause),

If you don’t go over those hills you’ll be digging yourself a big hole – you’re putting in almost half the equity, to get 15%??? They get a wage for working in the business and you get (interest on your loan)? You bear % of the risk and get 0%.

Run. Hide. Change your phone number.

This may look good on paper, but many a rich man has lost his wealth investing in a Brewery, you are better off spending your money on a Luxury Yacht – At least you can enjoy that before you go bankrupt!

A

 better deal as in this one?

1. You could negotiate better terms for yourself.

or

2. Invest into another venture. But you have to understand that it is extremely dangerous to invest in a private company – you essentially have no security.

This is the way you should structure the deal.

The property. 

I would buy the property outright and lease it to the business. No share splits,complicated ownership setups etc etc. Keep it real simple. If they want to own a 1/3 or whatever they have to divy up. None of this I'll pay my contribution in payments from the business rubbish.

Or alternative you buy into the business and then the business buys the property. The way they're trying to set up is more complicated than my mothers knitting.

The Business.

There's lots of way to contribute to a business other than money. Sweat equity, skill etc are appropriate components that can be valued. 

I have a friend who started the Loaded Hog in NZ many years ago along with 2 others. A friend and another person who was a master brewer. My friend put up 80% of the capital his friend 20% and the brewer put up his expertise. They had a an equitable percentage split which was close to equal 1/3's.

The first year they paid themselves $30k each. By the end of the first year they not only paid themselves but paid their start up costs as well. Friend is semi retired now and a multi millionaire from that one business that multiplied into several outlets around the country. 

In a business startup everyone puts something into the hat. That contribution is valued as a percentage of the business. If it's sweat equity you work at a specified valued rate and that goes into the business. So you might do 50 hrs per week at $80/hr. The contribution has to be valued at or near what it would cost you to hire a person for that position. Expertise is a little different. That's very hard to value but a brewer for example needs not only technical skill that could be hired but creative skill that may be hard to find. They're also a key strategic individual.

Usually partners will simply accept that one individuals skill is indispensable in a start up business so value that intangible component as an equal share and still pay a retainer out of earnings. That retainer might be discounted slightly during the start up phase and hit full payment once you reach certain milestones.

In deals like this everyone and especially key personnel have to make legally binding commitments to the business for minimum periods of time. So if the brewer decide to leave because of a dispute he would have to stay until a replacement was found and a handover completed or other wise be exposed to damages if the business suffered.

If someone wants to sell out you need a agreed to process to complete that. 

The problems I have with this deal is your mates, while experienced in running restaurants, don't seem to have a lot of knowledge or skill in setting up a multi owner business and know nothing about brewing. I also have problems with them in terms of they already have businesses that will take their time and attention. Startups require huge amounts of time and effort to get off the ground and build a customer base large enough to become self sustainable. Usually 3 – 5 years. Micro breweries were new 20 years ago and the market was open to innovative brewers. Not today. The market is more sophisticated and the competition is fairly robust.

My friend made a fortune because he was first cab off the rank, had unbelievable luck and produced a highly desirable product. I would not bet the house on this and I would want some pretty tangible guarantees, guidelines, legal agreements and personal commitments before I even considered signing on to this.

From your brief description above neither of your friends appears to bring much to the party at all. I'm left wondering what the attraction is if any.

Anybody came to me with a deal like that I think I'd die laughing. 

1. Neither of your proposed partners brings anything to the table (other than money) that has any equity value so your share holdings are based on dollar denominated share values. Their $1 does not buy any more equity than your $1. Your $240k = 40% simple.

2. Self appointed roles must first all be fundable. They can call themselves whatever they want but salaries have to reflect the limited capital a startup has. No one gets $200k/pa salaries for starters. In start ups like this you might be lucky to get $30k/pa if anything initially. Startup partners usually always get the same money and contribute the same amount of effort.

3. If you are not going to work in the business then what they are asking of you could be construed as seed capital. Now it's a whole new ball of wax. They have to suggest a value and offer you a percentage. You can structure this any which way that suits you. You could demand security or none at all. That implies that a secured arrangement provides for less equity than a higher risk unsecured arrangement. 

Under a seed capital arrangement I would want at least 49% for my $240k and with conditions.

1. The business must use up the owners capital first.

2. Before the first payment (no more than $30k) they must have achieved specified milestones.

3. Subsequent payments must show that the business has tangible equity developing within the business (stock, goodwill etc)

4. Debt to equity ratios must be agreed upon (overdrafts, lines of credit, creditor and debtor levels etc)

5. You must have 2 votes on the board of directors and a 3rd director must be an objective party with no financial interest leaving their 2 votes. 

6. Accounts must be audited every 6 months by an independent accounting firm. 

7. Business reports must be provided monthly.

8. Any significant event of interest must be notified with 24 hrs (accidents, legal complaints, substantial hold ups etc etc)

9. Veto rights on salaries although this could be a board function for senior personnel.

10. Spending over certain amounts must have board approval (plant and equipment). Budgets and expenditure must be pre approved by the board.

11. Deviation from business plan must be board approved.

You get the idea on the kinds of conditions you need to apply in order to protect your investment.

The command and control side can seem quite onerous so that needs to be balanced with arrangements that reward success in a growing business relative to your seed capital contribution. To encourage the stakeholders a substantial part of your exit strategy should involve selling back equity on a reasonable margin to risk reward basis. So you could offer 10% back at cost plus 15% after 12 months say. 

The reason for this approach is that if things struggle you want ample reward (49%) for the up front risk. If they hit their objectives like they claim then much of the risk has been eliminated so you reward that with a return to them of equity at cost plus a modest return. You do with a sliding scale all the way down to zero equity of you like. Up to you.

See my other post further down as well.

If anyone I did business with balked at this kind of offer I'd simply so that's OK I'm out.

PS.

If the guy can bring business to the table he can be accommodated with options, bonuses, profit share increase etc as a kicker. Just don't don't give equity away. That gives a huge chunk of not only future equity value away but also your share of future dividends as well. You also loose voting power which make you virtually powerless.

Over 5 years that could run into millions if this has as much potential as you say.