Should my lawn care business take on a silent partner?

There are times as a small business owner that you will meet someone interested in investing in a small business. Sometimes these situations work and sometimes they don’t. One thing is for sure, taking on an investor whether active or silent can complicate an already complicated process of trying to get a business off the ground. In this discussion from the Gopher Lawn Care Business Forum, we get to look more at the question of whether taking on an investing partner is worthwhile.

One lawn care business owner wrote “I am set to open my mowing business with decent equipment and professionalism but I was called today by a good friend. He wants to start a landscaping or pressure washing business but doesn’t have the time. He wants me to run the landscape business. I am in the position and already starting a company so I by no means need him as a partner but having a silent investor would be nice.

He wants to go buy a new truck, trailer, ztr, and other equipment so I’m stuck with a dilemma…. What to do! Has anyone ever used a silent partner? What kind of split should take place? I am thinking about offering a ‘x’ earnings on profit margin annually with regained investment over ‘y’ years. I insist that I maintain greater than 50% of ownership. What would you do?

I would never pay out all profit. I think I’m going tell him I want to give it a go by myself but would love for him to invest when the time is right. I.e. when I get big enough to have multiple crews.”

Lawn care business silent partner.

Lawn care business silent partner.

A second lawn care business owner said “If you want to do this you can set up a corporation and issue shares to him based on how much he invests and what you all agree on the valuation of the business. If you want to keep control of the company then only sell up to 49% of the shares.

When it comes time to send out dividends, if you decide to do this, you would calculate that out based on the number of owners and how much of the company each owner owns.

I would recommend that you read about this to understand more before you agree to it. This is not to be used as the final answer, you need to get a lawyer involved to make sure it is all legal.”

A third shared “I have done this quite a few times over the years with different businesses. Based on my experience, profit should be capitalized (allowing the company to grow) with two options in the share holders agreement. One is to pay dividends as declared by the board (cover your butt and set up a small board of directors) and the right to buy shares back at their book value (quite often angel investors will want a buy back at book value x 2 or another multiple). I would not suggest you pay out all profits though. Every company that wants to grow needs to retain a portion of profits.

I haven’t done this with my landscaping/excavation company. If I were in my mid 20’s with the knowledge I have today, I would do it in a heart beat and taken the company across the country. However this is a semi-retirement business for me now and it’s already larger than I really wanted.

I have seen a lot of train wrecks over the years with investors. Where shareholder agreements were created that were not drawn up by a lawyer that understood what the business owner wanted and the law where they lived can lead to big problems later. Small companies can take off big time with outside investments and then the entrepreneur who started the company can end up with the short end of the stick. This happens all the time.

When talking to potential investors, I try to feel them out so that they understand silent partner/investor, does not mean they get a cut, get to call every day, week etc asking questions. Just outline all this in the agreement and offer quarterly reporting and an annual meeting.

Make sure you have liability insurance so that the shareholder can not sue you should things go wrong, once again a lawyer will explain all this and it will only cost you a few hundred to have the agreement drawn up. Good luck.”

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