How Can I Structure Profits More Fairly?

Question

Hi All,Can you help me with some ideas on how to structure profits fairly?For context, this involves a deal with two family members - they've put up 2/3rds of the downpayment, but are otherwise uninterested in being involved.I'm putting up 1/3rd of the downpayment, am the financing sponsor (75%, under my name - I'm the only one able to qualify on the financial requirements), and will handle all management of the property.For family reasons, we're psychologically tied to an even (33%/33%/33%) split on ownership.  But given that I'd be doing all the work and bearing all the risk, I'm wondering what established precedent there is for compensating the additional risk and responsibilities that I'm bearing.

Michael Le · Answer

I think @Peter Mckernan is spot on with his advice. Get everything in writing. And while it might seem unfair that you're doing all the work for 1/3 the pay... you can also think of it as you would likely have no deal at all if they hadn't put up 2/3 of the money. As you get more of a track record then you can just borrow the money instead at a fixed percentage instead of giving up equity.

Peter Mckernan · Answer

Hello @Vincent Chin

Great that you are able to find a couple investors to help you fund the deal! I would suggest forming an agreement if that agreement is within an LLC, or formed by an attorney that is up to you three at the end of the day. The reason I suggest this before I answer the question is because you want to make sure that everyone is on the same page and in a year, or five years someone does not come back and say that they had no idea someone else was profiting more than the other on that particular deal.

That being said, I would first base the answer on how much experience you have first. If you have a couple deals underneath your belt I would suggest asking for more back on the deal since you are taking the bulk of the work. If this is your first deal this maybe your chance to shine and show them along with future investors your skill set to charge more on the next deal and other deals following that. The reason I talk about the experience for backing is because that is what would give you the leverage to charge more or less.

At the end of the day it is up to you and your partners to decide what works best and what to agree upon, but this is my two cents!

Good luck!!

JD Martin · Answer

Because it is family, you should split all profits 3 ways evenly since that's the way the cash is being put up. Unless you don't want relationships with these people any more.

That said, you should put a firm dollar value on your work outside of financing the deal, and those costs should be paid out before there are any profits. Treat yourself as any other contractor involved in this deal. Trying to back-door payments after the profits are issued are a good way to end up with hurt feelings.

Peter Mckernan · Answer

@Vincent Chin

For what to write in the agreement I would sit down with the two investors and come to an agreement on what they foresee this partnership going, what they are looking to get out of it, when they want to exit and if they exit what will happen at that point, what if they become bigger players in the partnership, what if you bring in more investors, and what happens if you want to step away.

These are all items that need to be discussed prior to forming the partnership. They many be awkward topics; however, all those questions need to be fielded and put into writing along with other things that are tailored to your situation.

After all that is discuss I would suggest getting attorney to draft it.

Bryan O. · Answer

@Vincent Chin have a talk with them. Maybe you get an additional 5%-10% for finding the deal since you are doing all the work. On top of that, you are the one that is carrying the financing, so maybe another 5%-10%. Look at the numbers from your angle and their angle. Yes, you wouldn't be able to take down the deal without them, but they couldn't do it without you either. Make sure it is fair and you get rewarded for doing a good job.

Maybe you structure it 1/3 around but get a bonus if it performs at XX%. That incentivizes you to do good, and lets them know you care about their returns as well.

Michael Le · Answer

@Vincent Chin, since you're borrowing the majority of the money anyway, will you have enough capital after this deal to handle the down payments by yourself going forward so you don't have to involve them anymore? If the plan going forward is to stay in this active/passive partnership then I would suggest you get some fees or a larger percentage of the deal then. How much would partly depend on how much profit you guys are making on these deals.

Vincent Chin · Answer

Thanks for the initial feedback @Peter Mckernan and @Michael Le.  Clearly understood about getting it in writing - the question is just what exactly I'd be writing down, terms-wise.

Insofar as experience, this would be my third deal, the caveat being that the first two were much smaller deals (each about 1/10th the size), about four years ago.

We plan to follow up on more projects after this one stabilizes (planning the next one around June of 2017); going forward it would be the same situation though - I'd be securing the leads, running the management and handling the financing.  They've both expressed that they just want to be passive.

How Can I Structure Profits More Fairly?

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