Good day all,
Please I need your Judgement and advice on this, cuz I know that There are entrepreneurs, business strategists and educated people on Nairaland

I will just go straight to the point cuz I’m not too good at telling stories.

Billy and Sam decided to setup a business as partners.

Out of the capital (100%) required to startup the business in their own little way after making all the necessary enquiries. Billy agreed to bring 80% of the capital while Sam brought 20% of the capital (cuz he doesn’t really have much at he moment according to him).

Since Billy is in his final year in school, he won’t be around for a very short period, Sam is to manage the business while Billy will assist him. To this end, they had an initial agreement that profits should be shared between them as 59% : 41%. (Billy gets 59% while Sam gets 41%)

While planning the business, Sam made projections that the beginning is going to be very difficult cuz they may not begin to see profits immediately and the capital will not be enough to cover the daily, weekly and monthly expenses/cost of operation of the business. That at some point, they will need to use their personal money or resources to keep the business going, till it is strong enough to carry itself.

Billy then said, that if it is going be so, the expenses should be handled by them in the ratio at which profit is shared which is 59% : 41% in any case the business cannot handle its expenses or cost of operation.

Sam disagreed and said, It’s not going to be convenient for him, that such expenses should be Handled by them in the ratio at which capital was brought and profits shared equally.
That is Sam is saying that Capital should be 80:20, Expenses 80:20, Cost of Operation 80:20 and Profits 50:50 because of his inputs.

Billy disagreed that it won’t be convenient for him to bring 80% of the capital, expenses and cost of operation but profit is 50:50. Pointing out that the reason Sam is running the show is because Himself (Billy) will not always be around for a very short period and he will also assist Sam in managing the business.

But Sam refused and threatened to back out of the whole deal. Billy then said if Sam wants it his way he should bring 50% of the capital and Expenses and Himself(Billy) will also be available for equal inputs in the business.

Right now this is an issue

Please Nairalanders please judge and give advice

NB: Billy has the capability to run the whole show himself.

Regards

Greed. The deadly killer that ruins cooperatives before they even take off

First billy and Sam shouldn't be in a business at all. Since neither of them can see beyond the projected profits

For a business to succeed, it must be born of a vision , the biz idea is just a starting point of the vision of either of the partners...if there's a vision behind the idea, then profit won't matter.
If they are in business for profit, they are on a very long thing and won't be in it for long.

Lurcky:


But Sam refused and threatened to back out of the whole deal. Billy then said if Sam wants it his way he should bring 50% of the capital and Expenses and Himself(Billy) will also be available for equal inputs in the business.

Regards

Good day sir.

You didn't tell us Sam's response to the above proposal but I assume he declined. Otherwise, we wouldn't be having this discussion.

Was there any reason Sam made a volte face regarding the initial agreement of 59:41? From my understanding, when the knowledge of the possible future expenses surfaced, the argument should be about how such unplanned expenses should be split (either by profit ratio or equity ratio). So I'm a bit thrown off balance when the whole discussion went back to the already finalized profit sharing plan.

In my opinion, the time, energy and skills brought to the table are as important as the financial contributions. However, I believe the profit sharing strategy initially agreed upon already takes care of that. 50:50 would be an overstretch seeing that Billy wouldn't totally be absent and would fully rejoin the business after a while. In fact, that would be unfair to Billy.

Now talking about sharing the unplanned expenses, I strongly believe doing using the profit ratio would only muddle things up unnecessarily. Everybody's contribution to the business is their equity and there should be a single equity percentage for easy calculations/management not just for this precise scenario but for many others in future. They already have a working equity ratio, regardless of when the cost is incurred, this ratio must be obeyed. If not, it might become difficult over time to evaluate each person's ownership. Let's be fair to Sam, there's no justification for increase in equity contribution (even if it's a future unplanned cost) without any impact on profit sharing. Thus why it's simpler to keep equity at the same ratio so that profit ratio doesn't have to change.

In summary, I suggest they keep the profit sharing as planned and also share the future expenses according to their initial contributions. This way, nobody wins, nobody loses; both get a part of what they desire. Most importantly, there should be a signed memorandum of association accompanying the business plan documents.

I'm having difficulties remembering who is who but the guy who brought 80% of the capital is right.

Extra expenses shouldn't be shared on the basis of 80:20 but 59:41 which is the profit sharing formula.

And the guy with the higher capital says he will still join in managing the business.

The guy with less capital shouldn't be greedy.

fykes:
First billy and Sam shouldn't be in a business at all. Since neither of them can see beyond the projected profits

For a business to succeed, it must be born of a vision , the biz idea is just a starting point of the vision of either of the partners...if there's a vision behind the idea, then profit won't matter.
If they are in business for profit, they are on a very long thing and won't be in it for long.

Let's stop talking like motivational speakers and get practical. The discussion they are having is very ideal for the success and sustainability of the business.

First, the primary purpose of a business is to maximize profits for its owners or stakeholders while maintaining corporate social responsibility and there'll be no business if there's no foreseen financial benefit aka profit, vision or no vision. So profit doesn't only matter, it's practically the goal of the entire project.

Second, vision for the business suggests that the owners want to see it go far and beyond. Such dream/vision, contrary to your submission, actually necessitates adequate planning at the early stages of the business development. Again, discussing equity/profit ratio is one of the key components of such planning.

Finally, it's an inevitable discussion and only someone who hasn't had any practical business experience would call it trivial. Two people are contributing money unequally to start up a business and you don't think profit distribution is a worthwhile discussion? So if you bring $10m and I bring $1k for startup, we shouldn't talk about how the profit would be shared cause there's vision?

WoundedLamb:


Good day sir.

You didn't tell us Sam's response to the above proposal but I assume he declined. Otherwise, we wouldn't be having this discussion.

Was there any reason Sam made a volte face regarding the initial agreement of 59:41? From my understanding, when the knowledge of the possible future expenses surfaced, the argument should be about how such unplanned expenses should be split (either by profit ratio or equity ratio). So I'm a bit thrown off balance when the whole discussion went back to the already finalized profit sharing plan.

In my opinion, the time, energy and skills brought to the table are as important as the financial contributions. However, I believe the profit sharing strategy initially agreed upon already takes care of that. 50:50 would be an overstretch seeing that Billy wouldn't totally be absent and would fully rejoin the business after a while. In fact, that would be unfair to Billy.

Now talking about sharing the unplanned expenses, I strongly believe doing using the profit ratio would only muddle things up unnecessarily. Everybody's contribution to the business is their equity and there should be a single equity percentage for easy calculations/management not just for this precise scenario but for many others in future. They already have a working equity ratio, regardless of when the cost is incurred, this ratio must be obeyed. If not, it might become difficult over time to evaluate each person's ownership. Let's be fair to Sam, there's no justification for increase in equity contribution (even if it's a future unplanned cost) without any impact on profit sharing. Thus why it's simpler to keep equity at the same ratio so that profit ratio doesn't have to change.

In summary, I suggest they keep the profit sharing as planned and also share the future expenses according to their initial contributions. This way, nobody wins, nobody loses; both get a part of what they desire. Most importantly, there should be a signed memorandum of association accompanying the business plan documents.

I disagree with u.

Unplanned expenses shouldn't be shared on the initial percentage of capital contribution.

Different terms for different scenarios.

As much running the business is as important as capital for the business, raising 80% of a business capital should carry some edge in decision making. That's what is called "stake" in business; irrespective of who is running it.

WoundedLamb:


Let's stop talking like motivational speakers and get practical. The discussion they are having is very ideal for the success and sustainability of the business.

First, the primary purpose of a business is to maximize profits for its owners or stakeholders while maintaining corporate social responsibility and there'll be no business if there's no foreseen financial benefit aka profit, vision or no vision. So profit doesn't only matter, it's practically the goal of the entire project.

Second, vision for the business suggests that the owners want to see it go far and beyond. Such dream/vision, contrary to your submission, actually necessitates adequate planning at the early stages of the business development. Again, discussing equity/profit ratio is one of the key components of such planning.

Finally, it's an inevitable discussion and only someone who hasn't had any practical business experience would call it trivial. Two people are contributing money unequally to start up a business and you don't think profit distribution is a worthwhile discussion? So if you bring $10m and I bring $1k for startup, we shouldn't talk about how the profit would be shared cause there's vision?

You can imagine why some people are still poor

OfficialAwol:


I disagree with u.

Unplanned expenses shouldn't be shared on the initial percentage of capital contribution.

Different terms for different scenarios.

As much running the business is as important as capital for the business, raising 80% of a business capital should carry some edge in decision making. That's what is called "stake" in business; irrespective of who is running it.

What if you failed to understand is that there's no business yet. The discussion should lead to the creation of one and everyone must agree before that will be actualized. The stakes only come afterwards when the business has gone live and the highest contributor automatically becomes the highest risk bearer aka stakeholder and that is where the decision making edge comes from. At this stage in business development, what matters is the initial agreement and provided each person is needed for the business to come to live, everyone must agree. Only suggestions and counter suggestions can be made. Having said that, you must also appreciate the fact that the decision making edge of a stakeholder that comes after the business has been birthed only applies to leadership/directorship (investments, cashflow, expense approval, etc.) and does not, in any way, give him any right to alter or dictate the memorandum of association. You don't tell people what they will contribute or gain, you suggest and they agree or disagree.

Now, down to your point, you said unplanned expenses shouldn't be shared according to your the initial contribution. That's very much subject to debate and I gave the reasons for my stance above. Any business justification for increasing Sam's expenses in future even when it wouldn't necessarily have any impact on his agreed profit? I take it that when you say different terms for different scenarios, you mean it's not obligatory to share future expenses according to initial contributions. That, I agree with. It's not carved on stone. But there should be a justification for changing contribution strategy.

OP, goodluck. It's been an interesting conversation and I'd love to stay and continue rubbing minds with the business management gurus above but I'm on a different timezone and I must return to work now. I'm afraid by the time I'm back, the thread would have gone far. I suggest you pick one or two things from each person's contribution and make an informed decision.

Ciao

WoundedLamb:


What if you failed to understand is that there's no business yet. The discussion should lead to the creation of one and everyone must agree before that will be actualized. The stakes only come afterwards when the business has gone live and the highest contributor automatically becomes the highest risk bearer aka stakeholder and that is where the decision making edge comes from. At this stage in business development, what matters is the initial agreement and provided each person is needed for the business to come to live, everyone must agree. Only suggestions and counter suggestions can be made. Having said that, you must also appreciate the fact that the decision making edge of a stakeholder that comes after the business has been birthed only applies to leadership/directorship (investments, cashflow, expense approval, etc.) and does not, in any way, give him any right to alter or dictate the memorandum of association. You don't tell people what they will contribute or gain, you suggest and they agree or disagree.

Now, down to your point, you said unplanned expenses shouldn't be shared according to your the initial contribution. That's very much subject to debate and I gave the reasons for my stance above. Any business justification for increasing Sam's expenses in future even when it wouldn't necessarily have any impact on his agreed profit? I take it that when you say different terms for different scenarios, you mean it's not obligatory to share future expenses according to initial contributions. That, I agree with. It's not carved on stone. But there's should be a justification for changing contribution strategy.

Like you rightly pointed out, it is agreement that give birth to the business.

And u must agree with me that these agreements need to happen now with every terms as distinctively clear as possible without any iota of ambiguity.

This is because changing anything midway into the business could be a recipe for conflict which is not good for a business at its nascent stage.

Now I still maintain that unplanned expenses shouldn't be shared on the basis of the percentage of initial contribution. Funding of extra cost should be renegotiated. Like you said, nothing is ingrained in stone. So arguing about how it is done elsewhere won't even suffice.

OfficialAwol:


Like you rightly pointed out, it is agreement that give birth to the business.

And u must agree with me that these agreements need to happen now with every terms as distinctively clear as possible without any iota of ambiguity.

This is because changing anything midway into the business could be a recipe for conflict which is not good for a business at its nascent stage.

Now I still maintain that unplanned expenses shouldn't be shared on the basis of the percentage of initial contribution. Funding of extra cost should be renegotiated. Like you said, nothing is ingrained in stone. So arguing about how it is done elsewhere won't even suffice.

I never disputed the need to have clarity and avoid changes halfway. You still didn't support your submission with any justification, bro. It should be renegotiated, OK fine. And the negotiation I'm proposing is using the equity allocation basis. I gave my reasons. That I'm using the existing equity percentage as a reference does not make it less a new a negotiation. Let's not make it look as if it cannot be re-used simply cause the ratio has been used before. Like I said, it's already a negotiation of it's own. If you think that is not ideal, then the question is, what is the negotiation you're bringing forward and why? It's not enough to say it should be renegotiated cause that is already what is happening and that is why we are here. You think future expenses should be shared according to profit allocation like the student guy said? If so, any business or mathematical logic behind that line of thought?

To further support my own stance, recall that these future expenses were not factored in when they made in the initial agreement. If the person that did the initial cashflow projection did his job well, a budget head for these expenses would have been part of the 80:20 deal and we wouldn't be having this discussion. However, since the business has not kicked off, it is still early enough to bring it in. But if the renegotiation would end up changing the percentage contribution in the long run as a result of these expenses, then they should be ready to renegotiate the profit sharing as well cause mathematically, that's directly proportional to the contribution in cash and in kind; the agreed profit sharing is a factor of the agreed contribution (cash or kind). Using the agreed profit sharing to allocate a part of the contribution will only lead to an infinite cycle.

Now, seeing that the student guy wants to maintain the initially agreed profit sharing, he can't easily push for a change in equity contributions (it's actually a change cause regardless of the fact that it's unforeseen, it's still part of the equity contributions that could have gone with the initial pool if they had enough visibility). These two are like the two sides of a pendulum, you can't just move one part without moving the other except one party is reevaluating his initial expectations (which no one would).

This is a case study question of the IMPLD professional certification exam.
I remembered answering that question during my certification exam.

Please ignore the typo-error I will be editing same.

Cases like this first thing first.
1. Who brought the business idea Billy or Sam?
2. Who has the idea and knowledge to run and grow the business other than financial and other start up?

We need to know this before we discuss Sam and Bully Profit and Equity revenue.

Let's do this way.
Assume you are Sam and you have a fish and chicken grilling business idea after working in a bar for many years.

Because you do not have money, you decide to approach a buddy of yours, explaining the details and nitty gritty of the business viz a viz capital and earning and he buys into it. He might have an idea about it but he certainly need Sam idea, knowledge, expertise and day to day presence in the business. While Billy comes around with hands in his pocket watching and cashing out like someone who put his money in MBA forex.

I won't call Sam request greed, neither will I see Billy as a wicked person. They need to work things out themselves * For me 80/20 Equity is fair since Sam don't have money,
* Profit 59/41 is also fair.
* The running cost is something Billy need to look into else Sam will inflate and use it to zap the profit and channel the money to set up his own business and abandone Billy&Sam Enterprise since his capital is just 20%.

Reccommendation
1. Let Billy employ a secretary or worker that he can have daily update of the place and provide Billys presence since Sam is feeling cheated by working alone. The worker will be Billys eye provide he/she is not compromised by Sam.
2. Install CCTV to record activities and how running cost are generated and managed.
3. From Sam's estimated short and long time revenue earning, estimated when Billy can recoop returns on his investment and profit then sign an agreement that no one pulls with that number of years add additional plus one year to ensure Sam don't wreck the business and abandone it with that period. Who ever choose to pull out forfeit business premises and cash in the bank.
4. Run a joint account and ensure are transaction are to be made with the account. Running and maintenance can be withdrawn when their is mutual agreement but profit must not be touch until the end of your financial year as agreed by both of you.

A typical Nigerian man will agree to your terms, wreck the business and open his own business.

Finally if billy can
1. 80/20 Equity is okay
2. 50/50 profit is manageable considering his input
3. Running cost should be shared 70/30 Billy/Sam, the more financially committed Sam gets the more he will be committed to grow the business.
4. The should be a time frame to re-invest some of Sam profit into the business to raise his equity to 80% of billy or refund billy 30% so when bully is presence to support the business 100% they can comfortably share 50/50 of the profit without referring to using the original equity percentage to adjust the profit in favour of Billy when Billy has understand the nitty gritty of the business which will bring disagreement
5. Lastly, their should be next of kin which will take over each others share in case anyone dies.

Advice to Billy
Because how you go into and manage joint business with people because many has been waste and sent to early grave because of revenue from joint business.

Thank you

musabayokanu:
Please ignore the typo-error I will be editing same.

Cases like this first thing first.
1. Who brought the business idea Billy or Sam?
2. Who has the idea and knowledge to run and grow the business other than financial and other start up?

We need to know this before we discuss Sam and Bully Profit and Equity revenue.

Let's do this way.
Assume you are Sam and you have a fish and chicken grilling business idea after working in a bar for many years.

Because you do not have money, you decide to approach a buddy of yours, explaining the details and nitty gritty of the business viz a viz capital and earning and he buys into it. He might have an idea about it but he certainly need Sam idea, knowledge, expertise and day to day presence in the business. While Billy comes around with hands in his pocket watching and cashing out like someone who put his money in MBA forex.

I won't call Sam request greed, neither will I see Billy as a wicked person. They need to work things out themselves * For me 80/20 Equity is fair since Sam don't have money,
* Profit 59/41 is also fair.
* The running cost is something Billy need to look into else Sam will inflate and use it to zap the profit and channel the money to set up his own business and abandone Billy&Sam Enterprise since his capital is just 20%.

Reccommendation
1. Let Billy employ a secretary or worker that he can have daily update of the place and provide Billys presence since Sam is feeling cheated by working alone. The worker will be Billys eye provide he/she is not compromised by Sam.
2. Install CCTV to record activities and how running cost are generated and managed.
3. From Sam's estimated short and long time revenue earning, estimated when Billy can recoop returns on his investment and profit then sign an agreement that no one pulls with that number of years add additional plus one year to ensure Sam don't wreck the business and abandone it with that period. Who ever choose to pull out forfeit business premises and cash in the bank.
4. Run a joint account and ensure are transaction are to be made with the account. Running and maintenance can be withdrawn when their is mutual agreement but profit must not be touch until the end of your financial year as agreed by both of you.

A typical Nigerian man will agree to your terms, wreck the business and open his own business.

Finally if billy can
1. 80/20 Equity is okay
2. 50/50 profit is manageable considering his input
3. Running cost should be shared 70/30 Billy/Sam, the more financially committed Sam gets the more he will be committed to grow the business.
4. The should be a time frame to re-invest some of Sam profit into the business to raise his equity to 80% of billy or refund billy 30% so when bully is presence to support the business 100% they can comfortably share 50/50 of the profit without referring to using the original equity percentage to adjust the profit in favour of Billy when Billy has understand the nitty gritty of the business which will bring disagreement
5. Lastly, their should be next of kin which will take over each others share in case anyone dies.

Advice to Billy
Because how you go into and manage joint business with people because many has been waste and sent to early grave because of revenue from joint business.

Thank you

Thanks for the advice