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Re: Profit Sharing Ratio Between Business Partners by olumaxi(m): 4:13pm On Sep 24, 2016
No money no bizness....idea needs money to bcome ideal

1 Like

Re: Profit Sharing Ratio Between Business Partners by pepperandsalt(m): 4:14pm On Sep 24, 2016
share according to initial partnership agreement
Re: Profit Sharing Ratio Between Business Partners by MistadeRegal(m): 4:14pm On Sep 24, 2016
They both should negotiate and agree on a percentage ratio. They both contributed immensely to the business. 50/50 is OK from my point of view.
Re: Profit Sharing Ratio Between Business Partners by muffyt05: 4:14pm On Sep 24, 2016
There should have been a partnership deed before the commencement of the business and well spelt out sharing formula as well as incentives accruing to each partners. Doesn't matter who the partner is,whether you best friend or a blood brother,the partnership deed highlights what each partner is entitled to cos at the end of the day,Yoruba will say "owo koniran" i.e money nor get family. As for this case,since there was no deed in place before the business commenced, a 50/50 formula won't be a bad idea to eliminate every bad blood but strongly suggests they both come up with a partnership deed ASAP
Re: Profit Sharing Ratio Between Business Partners by Houstency(m): 4:15pm On Sep 24, 2016
Based on their agreement. But it would have been best if the investor recovers his initial investment after which they share in any ratio deem fit by them(equity owned).
Re: Profit Sharing Ratio Between Business Partners by InvertedHammer: 4:16pm On Sep 24, 2016
60/40.
Investor: 60
Managing partner: 40

The person with the fund has more to lose. If the venture fails, both of you walk away. But he will walk away with additional N2m loss unless you have a forgone alternatives that are valued as much. In such case, both of you will be even. But your situation doesn't fit that scenario.

With your expertise, can you start the business without the fund? No.
With his fund, can he start the business without expertise knowledge of the intricacies involved? Yes.

If you want to appreciate his input, try getting a business loan from a bank. The risk is if you get a loan from the bank and the business fails, the bank expects their fund with interest back. The extra 10% you are giving up should be looked at as the tuition you are paying for the startup. Once the business is running and profitable, you can then re-negotiate for 50/50.

There you have it.
\

12 Likes 1 Share

Re: Profit Sharing Ratio Between Business Partners by JoRev(m): 4:17pm On Sep 24, 2016
Great idea's can not be bought with Silver or Gold (Money), but Ideas without Capital = daydreams.

I suggest, Partner One should accept 35%-40% and partner Two %65-%60.

Reason is: Partner One though you have all the monies and you plan to invest more, Partner Two has got the ideas and also invest his time and energy into it more.

When Partner Two realise you are not greedy for Monies, he will be happy,double his effort and bring more ideas that will creat trust and even make the Business grow bigger.

If you go for 50/50 I can assure you once the business is strong;Partner Two may, start another Business (on His own)and let the one you both have fail!

Make sure you have any sharing formula in written and documented form.

Thats just my Two cent.

2 Likes

Re: Profit Sharing Ratio Between Business Partners by sisisioge: 4:18pm On Sep 24, 2016
50-50 won't be a bad item for now considering that if the partner that invested 15% were to decide to sleep too, they would have to pay a professional with his capabilities to handle the work. In other words, the equal profit sharing will compensate for all the works he does.

50-50 appears fair to me for now. They could decide on a change of agreement in 2years.
Re: Profit Sharing Ratio Between Business Partners by eph12(m): 4:19pm On Sep 24, 2016
Who brought the business idea? The owner of the business idea is the owner of the business

3 Likes

Re: Profit Sharing Ratio Between Business Partners by yomi007k(m): 4:20pm On Sep 24, 2016
Financer partner 1 60 percent.

Manager partner 2 40 percent.


The manager shud know dt he needs d investor in ds initial phase n shud keep building his confidence.

In d future he can do wtout d investor.


My take.

1 Like

Re: Profit Sharing Ratio Between Business Partners by kaboninc(m): 4:21pm On Sep 24, 2016
4C2215131:
Hello All

Please, your opinion would be very welcome given this business scenario with regard to profit and/or Equity sharing between two business partners thus:

1. Partner one invested 85% of the monies needed by the business. He is a sleeping partner.

2. Partner two does ALL the job required by the business down to marketing at the very elemental level. He has the expertise and is an authority on the type of the business partner one invested in, in fact, it was the strength of his business plan that convinced partner one to invest in his business idea. He is the active partner and is investing all his time in driving the business to success.

To put it in perspective, it's a type of business that demands all of partner two's time involving much networking with people coupled with mental and physical work. For starters partner one has invested 2million (may be little by some people's standards but times are hard o!) with the possibility of injecting more fund into the business if performance within a set time frame meets with acceptable standards.

So there you have it. one man risking his money on the business idea of another without lifting a finger in terms of work save writing the cheque to fund the business. The other not bringing much (just 15%) in terms of fund to the table, all he does is put in all the work that generates the profit and drives the business.

how do you suggest they go about sharing the profits? please, business minded folks should chime in as I believe folks here may be engaged in this type of business arrangement already. thanks.

Seen, lalasticlala,I would very much appreciate it if this could make FP so more views and consequently comments could be generated. Regards.

Both partners are contributing what the have to the success of the business. One stakes more money than the other and the other stakes more time, effort and skills than the other. Personally, I would have love a debt-kinda partnership whereby as I own the idea, and I have a high certainty of the business succeeding, I'll rather you loan me some money to support my seed capital and repayment will be stretched over period of time - the longer the better.

Truth is, without money, business won't survive and without work business won't survive. If they share it 50/50, the guy who is bringing the bulk of the money would not be comfortable with it. He who brings the money always have a position of strength to bargain.

On the side of the entrepreneur:

So I'll suggest that the capital be turned into a Debt (and if both parties can agree, the debt can be turned into Equity should there be a default in agreement at a later date).

On the side of the venture capitalist, I would go for 70:30 - I take 70% and the other partner takes 30%. Lol I am greedy but what of the risk of uncertainty that the business will go south?

However, this should have been sorted out from the onset.

3 Likes 1 Share

Re: Profit Sharing Ratio Between Business Partners by Franky826: 4:21pm On Sep 24, 2016
helovesme:
Hmmm.

For a startup company, whoever provides the largest share of the funding required, should own the larger percentage of shares in the company and should also be entitled to the largest share of the company's profits.

However, in such scenario, the partner that's actively involved in the day to the management of the business could include a "shares buy back" clause in the agreement so that in a case where the business begins to trade profitably, he can either buy out his partner entirely or buy out a portion of his shares.

which economics/business textbook did you copy this from? undecided

1 Like

Re: Profit Sharing Ratio Between Business Partners by kolaish(m): 4:25pm On Sep 24, 2016
BESIDES THE EQUITY SHARING RATIO (85/15)THEY BOTH CONTRIBUTED, THE 2ND PERSON SHOULD BE PLACED ON SALARY AS THE MANAGER OF THE BUSINESS. I HAVE BEEN INVOLVED IN BUSINESSES LIKE THIS BEFORE AND WHAT WE DO IS FIRST OF ALL SHARE THE PROFIT ACCORDING TO HOW MUCH EACH PERSON CONTRIBUTED TO THE BUZ. SECONDLY, THE PERSON WHO SPENT HIS DAILY LIFE RUNNING THE BUZ IS PLACED ON A MONTHLY SALARY SCALE.

3 Likes

Re: Profit Sharing Ratio Between Business Partners by greggng: 4:25pm On Sep 24, 2016
Yinkatolu:
Profit should be shared based on agreed and documented profit sharing ratio.

In addition contribution should not be ruled out. In my own opinion profit should be shared 40/60. The one bringing capital should collect 60 percent while 40 is for the one with the idea. The risk in looking at contribution is that it will bring less motivtion from the one managing the business.

1 Like

Re: Profit Sharing Ratio Between Business Partners by Numericals: 4:27pm On Sep 24, 2016
They should have spelt that out in their deed of partnership. My opinion is of little or no importance.
Re: Profit Sharing Ratio Between Business Partners by Nobody: 4:28pm On Sep 24, 2016
It depends to a large extent on the profit being generated and on the worth of the second partner's skills. But in reality, the person with the skills gets the larger share of profit because he can easily get loan of same amount from elsewhere and pay back in like 5 years and become owner of the business especially since it's a small scale business

2 Likes

Re: Profit Sharing Ratio Between Business Partners by phyllosilicate(m): 4:29pm On Sep 24, 2016
Q: How do you divide the equity if two partners have money to invest, and the third has the idea and will put in the work?

A: This is a huge foundational issue that can make or break your company, as it will affect every aspect of the business and will have consequences for the entire life span of the venture. Therefore, it is important that you set yourself up for success.

The person who has the idea and is going to do the work should be the majority owner of the business with the money partners getting a small minor share. Too many founders make the mistake of giving away too much ownership, control, influence and power to the money partners.

While they should be super grateful for the offer of an investment, it is important to remember that the blood, sweat and tears, the long hours, the stress and the grind is for the founder to carry, for the most part, alone.

That said, the money partners are super important and are major reason why your business will succeed if you don’t have access to your own money. Just make sure that the terms and conditions are in the startup’s best interest. The money partners will not be running the business and they will have other careers and businesses to focus on besides yours. When the going gets tough, most investors will not be arm in arm with you solving and fixing the problems. Those that do are golden so try to seek them out.

The founder should be adequately taken care of with majority equity ownership percentage, stock options and a parachute should his/her employment be terminated down the road.

It is also very important that the investor is adequately compensated for their trust and belief in you. In many cases you can get a convertible loan or straight debt financing instead of giving away too much equity, as these are usually more attractive from a tax perspective to the investor.
The question of valuation and percentage ownership for the business partners is always a thorny and uncomfortable subject. Get a valuation formula or mechanism agreed to and in place up front before you take their check in order to avoid downstream problems.

Many businesses fail because the partners cannot agree on the value of the business and the ownership percentages. Most of the time this is because the founder thinks that their idea is the next billion dollar unicorn, blinding them to the reality that almost every business fails.

If your business is pre-revenue and pre-profitability it can easily be argued that the business is worth zero. So don’t kill a potential financing opportunity because the investor wants to value your "idea" at $ 500,000 or $ 2 Million. Be grateful that you are one of the few that actually get financed as most start-ups never do.


Do not make the mistake of trying to own a large piece of a small pie when owning a smaller chunk of a bigger more viable business would be better for you, your partners and the company.

Try to avoid investors who are looking to control you through the legal documents. Beware of agreements that force you to give up board seats, veto rights, anti-dilution rights and approval rights. Instead you want partners that believe in you, who trust you and most importantly who empower you and support you. We call this ‘friendly money’.

You want partners who add significant value by rolling up their sleeves, working in the trenches, providing mentorship, expertise, and/or connections. These folks are called "smart money."

If you can get both friendly and smart money then accept the investment with gratitude and run hand in hand with your new money partner towards success.

https://www.entrepreneur.com/article/274735

7 Likes

Re: Profit Sharing Ratio Between Business Partners by VEE2010(m): 4:32pm On Sep 24, 2016
@OP, from your explanation here, I think partner one is just playing a role not more than a money lender. To me, he should not earn more than 35% of the profit. My opinion though.

1 Like

Re: Profit Sharing Ratio Between Business Partners by Nobody: 4:32pm On Sep 24, 2016
4C2215131:
Hello All

Please, your opinion would be very welcome given this business scenario with regard to profit and/or Equity sharing between two business partners thus:

1. Partner one invested 85% of the monies needed by the business. He is a sleeping partner.

2. Partner two does ALL the job required by the business down to marketing at the very elemental level. He has the expertise and is an authority on the type of the business partner one invested in, in fact, it was the strength of his business plan that convinced partner one to invest in his business idea. He is the active partner and is investing all his time in driving the business to success.

To put it in perspective, it's a type of business that demands all of partner two's time involving much networking with people coupled with mental and physical work. For starters partner one has invested 2million (may be little by some people's standards but times are hard o!) with the possibility of injecting more fund into the business if performance within a set time frame meets with acceptable standards.

So there you have it. one man risking his money on the business idea of another without lifting a finger in terms of work save writing the cheque to fund the business. The other not bringing much (just 15%) in terms of fund to the table, all he does is put in all the work that generates the profit and drives the business.

how do you suggest they go about sharing the profits? please, business minded folks should chime in as I believe folks here may be engaged in this type of business arrangement already. thanks.

Seen, lalasticlala,I would very much appreciate it if this could make FP so more views and consequently comments could be generated. Regards.

The business is a partnership and should have an article of association ni matter how small it is. Since it's a business that requires customer sourcing and retention, there should be clearly defined, a provision of reward for customer sourcing. This is because in a case where one of the partners hadn't been a good marketer, the business would have employed marketers to do the job of customer sourcing and pay them.
As to profit sharing, the man who brought in 85% of the capital will definitely get a larger share of the "net" profit. I'm emphasizing the net profit because the second partner should benefit from the "expenses" of the business as he does the job of a marketer even though he's also an investor. It is left for the two owners of the business to sit down and draft a business plan (if they previously have none) and spell out all these things.
Re: Profit Sharing Ratio Between Business Partners by sweetmusictv: 4:34pm On Sep 24, 2016
I could barely understand the write up. Mod I suggest you use Partner 1 or "1st party" NOT ***partner one***.

Let me use the term boss for partner 1. Forget about idea or anything unless Partner 2 is family member and there is possibly informal consideration to share funds.
Idea is totally a waste without resource to implement it. So I term partner one as the Man employing partner 2 to help invest, manage or administer his funds (Whatever - In Jennifer's voice).

My suggestion, partner 2 should dwell on Salary not percentage unless he is an ingrate. Basically for a business to thrive there should be marketing, and I believe seeing profit after spending (not siphoning) money will impress the investor (Partner1)

In short, For the 1st party to entrust N2million into your nothing but an idea in Nigeria of yesterday, today and tomorrow, There should be respect and nothing like sharing.

Partner 2 is only a member of staff which I may term as Manager or Personal Assistant who need to market his idea to impress his BOSS and at the end of the month he will only collect salary based on 1st party's decision.

If the 1st party thinks his idea is important he should return the N2million and get loan from bank or creditor. Then he will understand what am saying.

2 Likes 1 Share

Re: Profit Sharing Ratio Between Business Partners by SeyiAyorinde(m): 4:34pm On Sep 24, 2016
50-50 is good.
Re: Profit Sharing Ratio Between Business Partners by debowale2015(m): 4:36pm On Sep 24, 2016
Partner A should take 60% of profit while
Partner B should take 40% of profit

1 Like

Re: Profit Sharing Ratio Between Business Partners by Preator: 4:36pm On Sep 24, 2016
quite straightforward I think. they should agree on a sharing formula though 85:15 should be fair enough. however, the partner contributing his time should be on a salary comparable to that which he will earn were he to be employed to run a similar business where he has no stake. by the way, partners salary will be deducted before the profit is determined and shared.

if there is no agreement and litigation arises, the Partnership Act will most likely prevail. it makes the following provision where there is no deed.

1. Profit and losses are to be shared equally
among the partners.

2. No partner is entitled to a salary.

3. Partners are not entitled to receive interest on
their capital.

4. Interest is not to be charged on partners'
drawings.

5. When a partner advances loan to the firm, he
is entitled to receive interest at six percent per
annum.

1 Like

Re: Profit Sharing Ratio Between Business Partners by Yinkatolu: 4:38pm On Sep 24, 2016
greggng:


In addition contribution should not be ruled out. In my own opinion profit should be shared 40/60. The one bringing capital should collect 60 percent while 40 is for the one with the idea. The risk in looking at contribution is that it will bring less motivtion from the one managing the business.
says who? Is that what the law says?
Re: Profit Sharing Ratio Between Business Partners by Daniyomex(m): 4:42pm On Sep 24, 2016
deriksneh:
99% & 1%
Who will be taking 99% and who will be taking 1%?
Re: Profit Sharing Ratio Between Business Partners by chudyboy05(m): 4:44pm On Sep 24, 2016
in partnership account as in this case ,there ought to be a well documented paper stipulating on, on how the profit of the biz should be shared(profit sharing ratio ). Meanwhile, since it wasn't documented, you can use the percentage of the contribution and let the sleeping partner compensate you a little for ur hard work. Though there should have been a percentage on how much to be given to the active partner but all the same ; just take correction in case of next time. Dormant or sleeping partner 60: active partner 50 somehow!
Re: Profit Sharing Ratio Between Business Partners by BioGreen: 4:45pm On Sep 24, 2016
the MOU/MOA should have spelt out the profit sharing formula upfront bearing in mind each partner's contribution in terms of finance, time/effort put in running the business & idea.

Finance:

Partner A = 85%
Partner B = 15%


Time:

Partner A = 10% (meetings, signing/processing cheque, etc)
Partner B = 90%


Idea:

Partner A = 30%
Partner B = 70%


Weighting for each aspect:

Finance - 60%
Time - 30%
Idea - 10%

Let Profit = P

Finance = 0.6P
Time = 0.3P
Idea = 0.1P

Assume Profit = 20 Million
Partner A gets = 0.85 x 0.6P + 0.1 x 0.3P + 0.3 x 0.1P = 11.4 million
Partner B gets = 0.15 x 0.6P + 0.9 x 0.3P + 0.7 x 0.1P = 8.6 million

Hence Partner A gets 57% while Partner B gets 43%

Note that the above partners contribution and weighting is debatable & subject to partners mutual agreement/acceptance.

..Call the above formula/approach/model "Onu-Dexter Profit sharing equation" (all right reserve pls; onudexter@gmail.com)

9 Likes 2 Shares

Re: Profit Sharing Ratio Between Business Partners by mark2sunny(m): 4:46pm On Sep 24, 2016
60%~40% In Favour Of The Investor. Money Is The Life Blood Of Every Business. There Are Great Idears Everywhere Wasting For Lack Of Money To Bring Them To Limelight
Re: Profit Sharing Ratio Between Business Partners by mark2sunny(m): 4:53pm On Sep 24, 2016
sane93:
It depends to a large extent on the profit being generated and on the worth of the second partner's skills. But in reality, the person with the skills gets the larger share of profit because he can easily get loan of same amount from elsewhere and pay back in like 5 years and become owner of the business especially since it's a small scale business
Loan from where? why seek for partnership when u can "easily" get a loan? who gives loan without a colateral? even getting an investor isnt easy
Re: Profit Sharing Ratio Between Business Partners by Agbanasm: 4:59pm On Sep 24, 2016
85% : 15% as profit sharing ratio while the active partner will take salary adequate to justify his work, experience and expertism

1 Like

Re: Profit Sharing Ratio Between Business Partners by Melonny(m): 5:07pm On Sep 24, 2016
There should be an agreed profit sharing ratio that is well documented.. Some facts should be noted anyways. the partner A owns more than half (85%) of the business.. Although he's a dormant partner but he should have more share from the profit or retained earnings.
Partner B is more like an Agent(MD).. the MD should own a share in the business too tho.
The risks will be shared between the partners equally, the rules says-but sudden closing down of the business, partner A will bear more risk(debt).
partner A should receive more profit and that should reflect in a documented agreement.
Re: Profit Sharing Ratio Between Business Partners by sdavirus: 5:15pm On Sep 24, 2016
Truth of the matter: Both are important.

Further truth: It's easier for the guy with the money to see what else to put his money in, than to see another that would be willing to invest N2m in something that isn't guaranteed (nothing is) in these times.


Yes, 50-50 should be the benchmark, but
If I was the one doing all the work, I'll suggest 60-40 sharing, in favour of the investor. Which would be reviewed at a stipulated time.

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