For what ever reason, business owners are constantly being asked to allow a friend or a family member in on the business. Everyone has a great idea on how they can improve upon your business. Yet when you take a moment to talk to them, most of the times, you find they don’t have a clue. Here is a great discussion from the Gopher Lawn Care Business Forum about one entrepreneur who has a friend that wants to start a division within his company. Good idea or bad? you decide.
One lawn care business owner wrote “I own a full service landscape company for the past 10 yrs. and I do good for myself, always trying to improve. I am starting school for irrigation and small engine repair next. But I have a problem that I need help with.
A long time friend, who knows a lot of people, wants to start a business with me. He wants to start a division of my company. He thinks a fertilization division would make a lot of money. He has no business knowledge or experience and does not want to. I would like to have him work for me but he wants too much an hour to start out at. I worry about the costs and having to pay for two insurances and other things. Has anyone ever tried this and how did it go? Should I start another company? I just worry about all the costs that I already pay for and would have to do again.”
A second lawn care business owner said “I think this is a recipe for a disaster, especially if he is a good friend of yours.
If he wants to start a business, fine, he should do it and you could throw him all the work you can possibly throw him. You would be a fantastic friend for helping him like that.
If he doesn’t want to learn how to run a business, he should consider being an employee. If he wants to be YOUR employee, then he needs an hourly figure that you can work with. Keep things simple and they tend to work better. Complicate things with friends trying to start a division of your company and look out for big problems.”
A third business owner added “although I would advise against this, there is a way you could do it theoretically. Basically the way it would work is you would form an incorporated company and roll all your assets into it. Come up with a share capital lets say 1,000,000 shares. Then you would set a share price, probably $1.00. Then you need to do a valuation of your company. Let’s say with goodwill and contracts it’s $125,000. Then you would receive 125,000 shares, you new partner would have to buy shares to gain ownership or you could issue him part shares as an incentive to perform.
This protects you so that you are not giving, in your case 10 years of business development away. The new company would have the ability to issue up to 875,000 shares but each time it does you need a current valuation or you need to issue each other an option agreement. These are generally one to two year agreements saying either John or Bob can purchase equity at $1.00 per share anytime up to a specific date in the future.
This is an inventive for everyone to perform, they are called stock options. It could be in 9 months time you have some cash and if the company does well. Let’s say the shares are worth $1.50, you still get them for $1.00.
Now if this sounds too complicated, maybe it’s better to avoid it all together and have your friend start his own business and keep everything separate.”
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