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Potential Partnership - where do you get help?

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My son asked me a question last night, that has me really excited but also worried.

Many years ago my son knocked on the door of a small professional firm and asked for a part time job while he went to University. The owner took him on. He has worked there through university and for quite a number years since full time. He is now in his early 30s and the boss is in retirement age (will probably never retire). He has offered my son a part of the business.

I see this as a very honourable act however he and I are not familiar with the 'dealings' in forming or being in what I see is a partnership (Initially 10-20%). The business has been around since the owners themselves were a young couple. Very respectable and professional.
Its almost a foster father mother son relationship. Hard nosed dad and son giving back lip - its that close.

So in short I know partnerships have a high failure rate but I see this as something you have to look at and come up with an answer.

So I am looking for any advice on where to go for help to make a good decision?
 

tech/a

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My son asked me a question last night, that has me really excited but also worried.

Many years ago my son knocked on the door of a small professional firm and asked for a part time job while he went to University. The owner took him on. He has worked there through university and for quite a number years since full time. He is now in his early 30s and the boss is in retirement age (will probably never retire). He has offered my son a part of the business.

I see this as a very honourable act however he and I are not familiar with the 'dealings' in forming or being in what I see is a partnership (Initially 10-20%). The business has been around since the owners themselves were a young couple. Very respectable and professional.
Its almost a foster father mother son relationship. Hard nosed dad and son giving back lip - its that close.

So in short I know partnerships have a high failure rate but I see this as something you have to look at and come up with an answer.

So I am looking for any advice on where to go for help to make a good decision?
Commercial lawyers will draw it up.
The contents will be up to the two parties.

Is there a consideration for the part share or is it given as an incentive to stay on?
If its a Company set up it will simply be a defined 20% stake with or without consideration.

Remember that he will be 20% liable in all business dealings so make sure its viable and insurances cover him
A chat with a good lawyer should be the first step where you ask questions.

Another way is to be given 20% of the profit without having a stake.
I do this with some employees. Not 20% ---this is very generous!

Definitely get the book work.

Good luck.
 
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Commercial lawyers will draw it up.
The contents will be up to the two parties.

Is there a consideration for the part share or is it given as an incentive to stay on?
If its a Company set up it will simply be a defined 20% stake with or without consideration.

Remember that he will be 20% liable in all business dealings so make sure its viable and insurances cover him
A chat with a good lawyer should be the first step where you ask questions.

Another way is to be given 20% of the profit without having a stake.
I do this with some employees. Not 20% ---this is very generous!

Definitely get the book work.

Good luck.
Thank you tech/a. I think it is a consideration for a part share.
I did wonder about a 'date stamp' on the agreement, do you pick up any future liability / incomes on something done in the past. Conversely any future from things in the past. Options to buy out the owner in the future. What happens when (s)he retires / dies etc. What the assets of the business vs owners. Existing Loans...
A new question pops into my head by the minute, and I know I have only scratched the surface. And that is before I get to stuff I don't understand.
 

tech/a

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Write them all down.
Eg what happens if the owner dies.
What if the beneficiaries want to sell.
Lots and lots

Until you have full disclosure you just can't know.
There are simpler agreements with a very similar result with NO RISK!
 
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My son asked me a question last night, that has me really excited but also worried.

Many years ago my son knocked on the door of a small professional firm and asked for a part time job while he went to University. The owner took him on. He has worked there through university and for quite a number years since full time. He is now in his early 30s and the boss is in retirement age (will probably never retire). He has offered my son a part of the business.

I see this as a very honourable act however he and I are not familiar with the 'dealings' in forming or being in what I see is a partnership (Initially 10-20%). The business has been around since the owners themselves were a young couple. Very respectable and professional.
Its almost a foster father mother son relationship. Hard nosed dad and son giving back lip - its that close.

So in short I know partnerships have a high failure rate but I see this as something you have to look at and come up with an answer.

So I am looking for any advice on where to go for help to make a good decision?
Nothing is really "free", but this or this might be helpful.
 

rnr

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My son asked me a question last night, that has me really excited but also worried.

Many years ago my son knocked on the door of a small professional firm and asked for a part time job while he went to University. The owner took him on. He has worked there through university and for quite a number years since full time. He is now in his early 30s and the boss is in retirement age (will probably never retire). He has offered my son a part of the business.

I see this as a very honourable act however he and I are not familiar with the 'dealings' in forming or being in what I see is a partnership (Initially 10-20%). The business has been around since the owners themselves were a young couple. Very respectable and professional.
Its almost a foster father mother son relationship. Hard nosed dad and son giving back lip - its that close.

So in short I know partnerships have a high failure rate but I see this as something you have to look at and come up with an answer.

So I am looking for any advice on where to go for help to make a good decision?
Not advice as such, however the links below may be of interest when considering running a business through a Partnership structure.

https://www.smallbusiness.wa.gov.au/business-advice/business-structure/partnership
https://nautiluslaw.com.au/business-advantages-and-disadvantages-for-partnerships/
https://lawpath.com.au/blog/advantages-disadvantages-partnership
https://legalvision.com.au/business...tages-of-operating-under-a-partnership-model/

Cheers,
Rob
 
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My son asked me a question last night, that has me really excited but also worried.

So I am looking for any advice on where to go for help to make a good decision?

The business is likely to be structured as either a company or as a sole proprietorship.

If it is set up as a sole proprietor, I would recommend a company is formed and the business in run under a company structure as it provides far better protections. Sole proprietor structures generally do not offer adequate protections.

I will assume the business is already set up as a company with shares held by the Owner and that it is relatively small. I have also assumed that the initial 20% is offered at no cost.

While this deal you have described may feel like a partnership, that is not what has been offered from your description and likely that is not the intent. A partnership implies equal rights, benefits, liabilities and authority for making decisions as to the ongoing direction of the business.

The proposal outlined of a 10% to 20% share is offering a minor shareholding in the company. This would provide a share of profits and (probably) some say in the decisions the company will operate under, however, the final decisions in regard to the business will still rest with the Owner as the majority shareholder. If your son becomes a director of the company, he will be exposed to the usual liabilities of a director.

These types of deals are quite common, particularly in regard to a small business and can be beneficial to both parties. A small business where the Owner is responsible for the day to day running of the company and is required to have some specialist knowledge and experience is extremely hard (if not nearly impossible) to sell when the owner wants to retire. Providing a shareholding geared towards an eventual buyout by a younger senior employee can provide a way to sell the business through a management buyout. This is usually preferable to just closing the business upon retirement.

For your son, it offers the opportunity to have a financial stake and possibly, eventual ownership of an existing (hopefully profitable) business that he otherwise would not be able to set up from scratch. Starting a business from scratch is a lot harder than taking over an existing one. Under this proposal he would slowly take on more responsibilities and learn how to run the business under the guidance of the Owner.

As Tech/a has said, an agreement needs to be drawn up by a lawyer. However, you will save a lot of time, heartache and money if before you see a lawyer, you first sit down and think about the outcomes your son wants. Then once you have an idea of what he wants to achieve, he can talk informally with the Owner about the outcomes the Owner wants to achieve. Once the intentions and desired outcomes of both parties have been identified in a general way, then you can sit down and talk with a lawyer.

This should be a lawyer that is acting solely for your son. The Owner will no doubt already have a lawyer he can talk to. The final agreement can be drafted by either lawyer and checked by the other lawyer to ensure it is fair and equitable.

Some of the issues that need to be considered before talking to the Owner or a lawyer are:
1. What are the long term goals
a) is your son interested in owning the whole company one day?
b) or does he just want some share of the profits while working there?​
2. What if your son wants to leave, how will his 20% be dealt with?
a) will his share be bought back by the Owner and if so, how will the price be determined?
b) can his shares be resold to a third party?
c) or will the shares just be worthless after he leaves because no one is interested in buying a minority shareholding?​
3. If there is to be an eventual management buyout by your son:
a) how will the price be determined?
b) will the shareholding gradually increase each year?
c) or will there be a buyout at some point in the future from 20% to 100%?
d) will your son borrow the money for the buyout?
e) or will the Owner provide a loan for the buyout, to be paid back from company profits each year?​

There are many more issues to be considered but this is a start.

While I have seen some of these arrangements go pear shaped, most have worked out exceptionally well for both parties. The key is to get the details right and well documented from the beginning.
 
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Big thanks to contributors to date. This has been really beneficial. Again thanks to the ASF and its contributors, feeling a lot better advised already.:xyxthumbs
 
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Maybe not.
Ask more questions of the owner's intent.
I need add a little more that I have been made aware of.
I am told it is a Pty Ltd company and according to its ABN; A fixed unit trust, (defn copied from the ATO site) essentially, the same as a fixed trust. The only difference is that the interest in the income and/or capital is represented by units - for example, the trust is set up holding 100 units and there are four beneficiaries who have a fixed entitlement to 25 units each.
So strictly speaking myself titling this as a "partnership" was in error, I have used the term generically but implies a specific style of arrangement. (I am learning with all thanks to you good people).
 
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I need add a little more that I have been made aware of.
I am told it is a Pty Ltd company and according to its ABN; A fixed unit trust, (defn copied from the ATO site) essentially, the same as a fixed trust. The only difference is that the interest in the income and/or capital is represented by units - for example, the trust is set up holding 100 units and there are four beneficiaries who have a fixed entitlement to 25 units each.
So strictly speaking myself titling this as a "partnership" was in error, I have used the term generically but implies a specific style of arrangement. (I am learning with all thanks to you good people).
Then it may be as simple as the company issue additional "units" to your son (or re-allocates units) such that he receives X% of (monthly, quarterly, annual) profits, and his weekly salary reflects the role he plays in the company.
 
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