New Buisness partnership advice needed

[cheferson]

So I met with an owner of a local farm . She has started to grow mushrooms , but has almost no experience or knowledge in their cultivation. Thats where I come in , I have lots of cultivation experience and some good contacts in the industry . She already has a successful farm in operation. She has all the insurance , property, storage , green houses and capital to get it all going.

She is interested in maybe forming a separate mushroom business with me in the future. For now she wants to do a some what informal partnership. Ill supply free labor and knowledge and she will supply the space, capital and her distribution network. Then we'd spilt the profits .

What can I do to protect myself from teaching her what I know and giving free labor to get it going and then getting tossed to the side? Not that I think she is this kind of person , but I want some kind of legal document to solidify the partnership to protect myself .

[JohnnyD]

Best advice would be to consult a lawyer. A few hundred dollars now to save you hours of your time and heartache later.

Some informal suggestions as options to consider researching further (maybe to ask the lawyer):
-Get all agreements in writing in the form of a formal contract
-Consider forming an LLC with the woman
-Consider contracting with her as a consultant, where she pays you a fee plus XX percent of profits

Quite frankly, I would never allow any sort of "informal partnership" if I'm making an investment of any type(time, knowledge and experience would your investment - and a very valuable one). Been burnt far too many times in my business and some people that come off as the nicest people in person can turn out to be the biggest scumbags when it gets to money.

Make sure you have a goal. Working and teaching her without one is setting you up for let down.

She is interested in maybe forming a separate mushroom business with me in the future. For now she wants to do a some what informal partnership. Ill supply free labor and knowledge and she will supply the space, capital and her distribution network. Then we'd spilt the profits .

I would remove any "for now" type of mentalities. "For now" is right next to "Good enough" in my book and to me is a mindset that you're accepting that the situation is not good enough and will have to be changed in the future - why not make the necessary adjustments right away? Begin the working relationship with a solid, well-defined foundation and build from there.

Unfortunately in today's business world, a person's word with a handshake means nothing. Cover your rear and talk with a lawyer.

[cheferson]

Thanks! Great advice! That's kind of what I had been thinking. Im very green on the business end so any and all advice is appreciated! Any others?

[Raven]

all sound advice from JD

people many times learn the HARD way not to
ever do (again) what your proposing to do.
so my point is that your relationship professionally
has to be ROCK solid.

that being said..........

rather than going into it Blind ....or based on wishful thinking
you need to get your expectations actually heard and recorded
so that ALL cards are out on the table.leave none unturned!

I would discuss scenario's with her that covers things like
Ultimate success... or failure and EXACTLY what "each other's"
responsibilities (expectations) ARE ...where you'd hope to be in 5 years (very important)
and how long she actually wants to be committed to the shroom project.

[cheferson]

She has just started the mushroom aspect of her operation , it has had lots of great feed back and interest . So this is kind of still the test phase .She already has a successful microgreens operation going. This will be to supplement the microgreens . She is at this farm for the haul, she plans to die there . Her goal to make everything worth while and to benefit is to eventually gross 1 mil + .

Thanks Raven

[zacs]

It sounds like a good idea, and I can understand not wanting to get too bogged down with legal nonsense, and on the other-hand, wanting to cover your a$$ too.

In my opinion, the big question is... how are you going to determine "profit."

Profit = Sell Price - Cost.

So how do you determine cost?

Cost of Materials... easy enough.
Labor.... you say your labor is free. So you don't calculate it into the COG? That isn't really fair to you and isn't what I would call a partnership. If you don't calculate it into the cost, then basically it gets added into profit and she just got half your wages. But I guess if that is what’s in it for her then so be it.
Overhead... this is where things get tricky... consider cost of using the space, electricity, insurance, water, gas/oil, etc... Then there is other stuff like taxes, depreciation and whatnot, but I am not an accountant, i just have some business experience.

What I know is that cost is complicated to determine, and you want to make sure this is ironed out before you start, so that when you go to market and sell $100 worth of mushrooms, she does not come back and say profit was $2, so here is your buck....

Personally i can't stand dealing with lawyers. If this is someone you really feel like you can trust, then I would just sit with her and try to work out all of the details & expectations ahead of time. I would not hold any punches & be as completely direct as possible. If you are thinking something, better to just get it out in the open and discuss than to beat around the bush. Once you are both on the same page, get in the dark and start growing shrooms.

That is my opinion - fwiw

[cheferson]

Good point on what will determine what the profit is. I don't mind the labor part so much as she is supplying the funding, insurance , space, etc that would be impossible for me. PLus she alread has the brick and mortar and distribution all set up . SHe even told me to talk to a lawyer too . I do get a good vibe from here , but as other have said best to cover your ass on all bases.

[afterhours]

a very wealthy man told me many years ago- partners are for dancing...

[cheferson]

But no partner means , this goes on the back burner for me for a few years until I have the money . Mean while she is building her mushroom business regardless of what I do , while Im still waiting....

[zacs]

Originally Posted by cheferson

...I don't mind the labor part so much as she is supplying the funding, insurance , space, etc that would be impossible for me.....

Don't forget, that all of that is getting covered in the Cost ( in theory). So everything she puts in comes right out (agin, in theory).

She is also building HER brand I assume? That has significant value that is very difficult put #s to.

Don't sell yourself short.

And don't forget your exit strategy.

[Nebe]

all these guys are posing very valid points.

is she single?

[BigFish]

If you are not careful she may treat you like a mushroom.....keep you in the dark and feed you lots of s-h-i-t! I don't like the smell of it Chef....she has all the money invested....what does..."split the profits" mean?? 50/50??? 60/40??? 70/30??? See a lawyer if you like......I would just plain want to be paid for my time......keep all the info to yourself.

[cheferson]

I hear ya BF, but the alternative is working for mousilini , getting the shaft daily, nit picked , for chump change and 24 hours a week now , and 32 in the summer . Yey!!! NOT!

[Nebe]

After some thought, I would say that if i were in your shoes, i would say partner up or nothing... by her saying she might want to do something down the road, is pretty much telling you that she wants to keep her options open with you, but get everything out of you that she can. What is between your ears is worth a lot to her and it is worth it for her to commit something to you.. Right now, she is giving you nothing really.. As zac said, what are profits? she can say that she is operating at a loss for years and you will get nothing. If she agrees to 50% of gross sales, then OK.. she is willing to eat the loss and you will walk with some $$$

[zacs]

OK, after considering this some more, here are some more thoughts.

Seems like your main concern is you put time and effort in, she gets a mushroom business started, and you are out in the cold (or in the dark may be more appropriate...)

Right?

I can almost gaurantee that is what will happen. Without making you an official legal partner of her business, or a divission of her business, I can't see it ending in any other way.

A quick question for you. Is there room for more than one specialty mushroom company in the SE New England market? If so, then take this as a great chance to learn the buisness side of growing fungus, and the ins and outs of how to start up this type of company. Go into the deal knowing your are building her business, make all of the mistakes on her dime, then when the time is right, go start your own place... this happens all the time in my business, which explains why there are so many sefood guys out there. But if the market can't support you both, then this may not work...

You could even tell her you just want to work as a consultant for her mushroom start-up. All she has to cover is your fee, and you do all the work. That is always a possibility. Or tell her you just want to be the VP of her Mushroom Division, and to put you on a salary.

Anyway, obviously things are a little slow for me right now, I gotta get back to work.

good luck,

Zac

[RIJIMMY]

all very good points. You left out one very important topic.
Taxes. Taxes on the assets of the business, taxes on the profits, inventory. Tax, Tax, Tax, Tax! Assuming this is in RI? Then add another Tax!
You're either a partner or an employee for tax purposes, there is no in between. I dont see any other way around it. Many successful businesses have been started from similar situations as yours so I dont think its that hard. Dont do anything informal, make it formal.

[zacs]

Originally Posted by RIJIMMY

You're either a partner or an employee for tax purposes, there is no in between.....

That is not exactly true. He could be a 1099 - which is an independent contractor.

But Jimmy is right, you really do need to formalize exactly what the relationship is and go from there.

[cheferson]

First off thanks for all the advice! Lots of great suggestions ! I def want something formal , I also was thinking the 1099 as a way to claim taxes. I also do see me getting kicked to the curb ( maybe?) after she sucks my head dry . My big thing is I have some good industry contacts. I know right off the bat I could save and make her money through this contact almost immediately . I want to avoid introducing the 2 of them without something formal between her and I in place.

On another note .. SOme times life works in crazy ways...
Went into work today and got laid off.

[cheferson]

Anyone know any good lawyers down in soco/newport who specialize in business law?

[RIJIMMY]

Originally Posted by zacs

That is not exactly true. He could be a 1099 - which is an independent contractor.

But Jimmy is right, you really do need to formalize exactly what the relationship is and go from there.

You're right, I was lumping contractor in as employee.

[zacs]

Originally Posted by cheferson

Anyone know any good lawyers down in soco/newport who specialize in business law?

eff the lawyers. lawyers suck, are expensive, and should only be a tool of last resort. go talk to the lady and hash out the deal. If you need a lawyer to sort it out then it probably isn't going to work. Its not like you are trying to merge two agribusiness giants. Just talk to her and be honest with your concerns. There is nothing wrong with wanting to make money, and let her know up front that you just want to make sure you understand what is in this relationship for YOU.

Again, this is just my oppinion, and I'm sure many will give you other advise. So use your best judgement...

[cheferson]

I agree , But with no lawyer how would I ( greenhorn) know that are agreement was binding? ANd would be worthless paper when it comes down to it?

[spence]

I'd look into starting the mushroom business as a separate legal entity. This way it can be run as a business and you can have a contract that dictates who owns what share of the business and how profits are allocated and how decisions are made.

There's no way you can keep her from learning, but this might protect you from her trying to push you out and operating under her own brand too soon. Best case may be that the business grows and she buys you out. You take the money and compete...

Get an attorney.

-spence

[Backbeach Jake]

How much space do you need? Can you find it elsewhere and be your own boss? Does it need to be inside? Just asking.

[cheferson]

Originally Posted by Backbeach Jake

How much space do you need? Can you find it elsewhere and be your own boss? Does it need to be inside? Just asking.

Some can be outside, but most get romped by bugs and their maggots! As far as space , a decent amount. At least a trailer to grow, another room to incubate , clean room, processing , storage , etc. I did it out of my house/yard for a bit. It quickly became a pain in the ass doing it here.

Maybe Ill go talk to a few other farms and see what offers they would have to? But she is a licensed processor too and has almost all of the needed infrastructure . Also just getting laid off isn't going to help me start anything up or get approved for a loan either...

[JohnnyD]

Originally Posted by zacs

eff the lawyers. lawyers suck, are expensive, and should only be a tool of last resort. go talk to the lady and hash out the deal. If you need a lawyer to sort it out then it probably isn't going to work.

I'm sorry but I couldn't disagree more with the above statement. chef, the lawyer you find should make sure all your loose ends are taken care of and you are legally covered from being taken advantage of.

For example, say the business explodes quickly and becomes extremely successful within 12 months. If you're working with her under terms you two wrote up over coffee and agreed upon, what if there is a big hole that allows her to give you the boot? Worse yet, what if she gives you the boot even without any legal ground but the "contract" isn't clear enough and left "open for interpretation" by a judge?

A good lawyer should help prevent the worst-case scenarios from happening and cover your tail if they do occur.

[cheferson]

Originally Posted by JohnnyD

I'm sorry but I couldn't disagree more with the above statement. chef, the lawyer you find should make sure all your loose ends are taken care of and you are legally covered from being taken advantage of.

For example, say the business explodes quickly and becomes extremely successful within 12 months. If you're working with her under terms you two wrote up over coffee and agreed upon, what if there is a big hole that allows her to give you the boot? Worse yet, what if she gives you the boot even without any legal ground but the "contract" isn't clear enough and left "open for interpretation" by a judge?

A good lawyer should help prevent the worst-case scenarios from happening and cover your tail if they do occur.

That's exactly what I want to avoid and why I will be calling around tomorrow.

Thanks for all the advice everyone!

[Nebe]

Best of luck to you chefaroni!
Posted from my iPhone/Mobile device

[Raven]

one last point... Chef...

your labor is Worth X amount of dollars per day or per hour
or per week... ect

you have to always keep that in mind -> as it is a trade off

your expertise in exchange for use of space, materials
so "your" personal profit margin should reflect that

or at least be considered a "GOOD trade"

[stcroixman]

chef

you should have a lawyer and your accountant work on an LLC operating agreement which spells out everything. Informal means you could get screwed.

You will have what the IRS calls a "carried interest" i.e you are rendering services to the partnership and your partner is rendering capital and her farm. It also sounds like you will be designated the manager.

You need to establish the values of these contributions upfront.The risk is someone else does , like IRS.

BTW this is a common setup in real estate partnerships.