I'm gonna keep this quite short I am just looking for some input on this situation.

I made a thread a few years ago about partnering up to open a mattress store in a city of about 20 000 people with a drawing area of about 250 000. I ended up getting 30% equity in the business and things took off. We did 1.1 mil in sales year one, did 1.34 mil year two, and if we don't hit 1.5 mil this year we will be disappointed. Last year I drew about 140k so we're profiting nicely.

My partner got married and his wife wants us to open a bedding store for her to essentially run. I think it will make money as there is definitely a need for it in our city. We'd be selling sheets, pillows, mattress pads, duvets, duvet covers, some home decor etc etc etc etc

Original plan was for him and I to put up the money 50/50, and split the equity 3 ways: 33.3% ea. me and him for the investment and 33.3% for his wife for running the store. We figure it would cost about 80k to open, the majority of the money going towards inventory. It'd be a simple store to run with very little overhead... we know the landlord very well of the commercial space we'd be interested in renting and we'd be able to negotiate a very very good lease, even as short as 1 year, with a couple months free to get started.
Even if business failed completely most of the original investment would not be lost as we'd just sell of inventory, so again, not really concerned about money involved.

Curious to know what people think about the original plan? Me front half the money for 33.3% and essentially being a silent partner. It feels more like I'm front half the money with 1 other person for only a third of the business, as he and his wife obviously have the same bank account.. To me, problems arise here when she's not working full time, and I'm leery about partnering with a couple. I can picture it very well- things get rolling with the business and theyre going great and all of a sudden she doesn't need to work full time and then he and her have locked in 66.6% and shes working 1 or 2 days per week while we pay someone to work at the store. I am not unreasonable.. obviously if things were rolling 5 years down the road I would not expect her to be there full time if she didn't have to. I can just see a year in she gets sick or gets pregnant or something and all of a sudden shes hardly working and they're taking home 2/3s it just doesn't seem right. I don't really see eye to eye with my parnter's wife (like most guys probably don't with their friends' wives) and they both know that. She certainly wouldn't be somebody I would choose to enter business with if she wasn't my partners wife. It should also be noted she has gone bankrupt and failed a retail business in the past.

I expressed my concerns and am not sure I like this deal. We decided I would need some skin in the game, though, as our store already sells pillows, sheets and mattress pads. Not a huge selection, and theres really not the right environment in our store or enough room to expand these lines. I don't think our sales of accessories would be hugely effected, but I would need a part of the other store as essentially it would be competition. It'd be important for morale, and cross-marketing between both stores, etc.

We were thinking I'd give them 10k and receive 10% of net profit of the bedding store for its existence. Silent partner, just hopefully getting a cheque every month.

Thoughts? Should I have not rejected the first deal? Thoughts on the 10%? Am I being treated fairly? Is this a ticking time bomb? Appreciate any input.

I understand doing what you know, but isn't there anything else you all know besides bedding? Why create competition for your already successful business when you can create another store that isn't going to compete with their first business?

Why is the wife getting any equity for working in the store? Why not do 50/50 between you and him and negotiate how much she will get paid plus bonuses if the store hits certain revenue goals?

The first deal were you only get 10% is scary considering they have incentive grow the new store and run the current store out of business.

lol why would you ever put in 50% of cash for just 33% equity. If they're husband & wife, they've got to figure out rest of stuff on their end. For 50% of cash, you get 50% of equity and they split the rest of 50% however they want to.

I have same concerns about the 10k for 10% as bahbahmickey (are you still putting in 50% cash for this deal or they put up all the money and they're just giving you 10% for the competition.) Either way you've basically got to run a spreadsheet model to see breakeven of the 10% deal and see if sales will erode in your original store more than that b/c of competition. If so, its obviously a terrible deal.

Looks like you posted this to confirm your suspicions that it's a terrible deal. Well, you're correct - it's bad. You're subsidizing your partners wife, which is dumb because you've mentioned she's a perpetual failure.

Forget this piddly crap. I remember your last thread, you have a franchisable business on your hands that you don't have ownership over. You have sales processes that you can easily replicate, you have operational processes. Start your own chain and ditch your partner, Ray Kroc style. Your partner is happy with what he has, he's happy to run his little store and get fat off burgers and domestic beer. You're a young guy, you can shake up a mature industry and become ridiculously wealthy in the process.

She could either get salary or equity but not both. There is absolutely no justification for that here.

All makes sense to me, reject her or reject the deal, if you can't make that work, put it on salary and put up 50 for 50. Might take a great degree of influencing since you're talking about the wife, could take a bit of persuading to your partner to make it clear that she be in a role of the business that can be replaced by someone else down the line (and be paid in an identical manner).

Would never do a deal where dilution happens immediately. Your concerns are already on track about this. If you are going to do the deal structure it so that you get however much you are investing in % and are diluted to 33% after you get your investment back (and the other guy who put up money)

She essentially made 26k off you just by you agreeing to the deal and your stuck with all the liability.... why would she work when people give her free $$??? She has all the leverage and all the ability to get an even better deal then she already got once your committed. If she wants equity she has to either risks her time or money and the expectation of time is not enough as there is no incentive.

Best solution though is u and ur partner start the business with her on salary if she wants to be involved but know your subsidizing her just to keep partner happy. best to avoid her like the plague but she weezled her way in so your kinda screwed.

This kind of arrangement where someone works for equity (which you guys evaluate at 26k?) is not that unusual, even with a salary attached. That said, when the other two parties are literally married, I think this is a really bad deal. But you seem to have non-financial considerations so you may be stuck.

If you had to do the deal, I suggest you structure it differently. You and your partner get 50% equity each and she gets paid 25~33% of profits and you and your partner split the rest. In a more formal deal, responsibilities she'd have to undertake to earn her share would be listed in detail but you may have to to rely on good faith given the situation.

This way you retain control and don't get screwed in the event of liquidation (imagine her just giving up half a year in and taking her 1/3 of the liquidation value)

If this deal goes down the over/under is 21.5 months that they try to talk you into closing the first store you have 50% interest in and going hard for the 2nd store you have 33% in.

It sounds like there's a lot of value to be had from the synergy with your mattress store but do you really need a new location for that? How much floor space is required? A good chunk of the value that you're trying to capture could be realized through a very limited product line dangling in front of people who just bought a mattress from you.

In this transaction they should be 1 person.

great point (and O/U flip ref )

grunching having not read everything.......

wife gets free significant equity or significant salary/bonus/small equity/equity that grows if earned........ but NOT significant both.

i'm from vancouver.... google rob feeney lumiere david and manji sidhoo if you want to learn about going in 3-way partnership with husband/wife. you/rob basically are 33% owner with 67% partner.

not sure if this is feasible or would work, but can you bring in 3rd arms-length partner for small equity and have 3 person vote with husband/wife as one vote? i'm thinking they still have 67% - less small piece for indy person - of equity.

i think psychologically husband/wife think they are right as they will think they think/act independently but of course they don't at all for many reasons - not least of which the male partner of yours wants to keep a happy marriage, often at your expense.

tough call as sounds like you have existing lucrative relationship with these people......... but all i see is major problems down the line.

http://www.theglobeandmail.com/life/...rticle1327714/

this type of arrangement killed vancouver's #1 restaurant and its "rock star" chef - didn't kill the chef literally......... and i will note that i have no idea sidhoo's were wrong and there may have been other speculated factors that might not have looked so good on feenie.

but whatever validity of other factors or what really happened, it always read like 2 against 1 to me.

if you say no, do you think it will negatively affect current biz relationship?

Jojobordello

This is an unfortunate situation that you have been put in, and there will undoubtedly be hurt feelings on their side if you decide not to go through with it.

All of the other points that have been mentioned in this thread are very valid - she can't get equity and a salary, and you certainly can't give them 66% of the business while putting in 50% of the money. There is just no way that either of those two scenarios will play out well in the long run. 10k for 10% of profits won't work either - I could easily see a scenario where your partner "helps her out" in the second store while the profits at the first place tumble.

They are a joint unit - they get 50%, not 66%.

In my opinion, the only way this could work would be to expand your current location to a bigger space (if possible) and include bedding, duvets, etc in that location. It just makes sense - why send people to a different store for those items? I'd pay the wife a salary with a percentage of net profits for her section of the store, with the expectation that she'd put in the necessary hours. This is an area that you wanted to get into anyways - if she decides she doesn't like it, you can hire somebody else to man that part of the store.

I have a feeling, however, that she wouldn't want to go for this, as she probably is fixated on the idea of having her own store.

Or, alternatively, you can ask for them to buy you out and you go do your own thing, as this likely isn't going to end well for you.