partnership agreement

nino1

i am buying a business for €1.5m of which the bank is looking for €500,000 up front.
i have an investor who is putting up the €500,000

he will be silent for the most part but i will benefit (slightly) from his buying power as well has his advice and experience ( he has 4 shop in the same industry)

we are meeting an accountancy firm to decide the details of the partnership and discuss the different options.

what are the most common types of partnership in this type of situation?

i would perfer to but him out over 10 year period or so.

what would a good ROI be for €500,000 over 10 years ( solid industry, not much risk)

im looking to have a better idea of the different options before i meet the accountancy team.

thanks in advance

thegolfer

nino1 wrote: »

i am buying a business for €1.5m of which the bank is looking for €500,000 up front.
i have an investor who is putting up the €500,000

he will be silent for the most part but i will benefit (slightly) from his buying power as well has his advice and experience ( he has 4 shop in the same industry)

we are meeting an accountancy firm to decide the details of the partnership and discuss the different options.

what are the most common types of partnership in this type of situation?

i would perfer to but him out over 10 year period or so.

what would a good ROI be for €500,000 over 10 years ( solid industry, not much risk)

im looking to have a better idea of the different options before i meet the accountancy team.

thanks in advance

What form is the business taking partnership or company, as the taxation of both is treated differently, along with business risk and liability etc.

If a direct partner will he have a 33% share of the profits or is he limited, with a set return, irrespective of earnings. If having 33% share of profits, and earnings fluctuate annually both up and down, will the investor be satisfied with those profit returns.

What are the terms of the repayment of the loan, annually, or at the end of the 10 years?

If a partnership then you'll be exposed to the higher rates of tax. Assuming that there's a 10 times earnings on the business, and you're purchasing it for €1.5m it assumes a rough €150,000 annual profit, if not more assuming a lower earning ratio, will the partnership structure over company and higher taxes impede the performance and repayment capacity, additionally exposing you to more risk than a limited entity.

If the industry you're in is low and not much risk as indicted then some return slightly above normal would be justified, as then it should not be that difficult to obtain finance to buy them out at a later stage. However, if it were a higher risk industry then its open-ended what return could be demanded.

Looking at the S&P 500 it has an average 20-year return on investment of 9.85%, so possibly 10% could the mark.

Lots to think about..

nino1

thegolfer wrote: »

If a direct partner will he have a 33% share of the profits or is he limited, with a set return, irrespective of earnings. If having 33% share of profits, and earnings fluctuate annually both up and down, will the investor be satisfied with those profit returns.

I will be hoping to agree a set return.
I think a 33% share of the profits is not realistic for a silent partner.

would a 10% return be considered reasonable?

If I would pay him back €55,000 each year for 10 years he would get back €550,000 for his €500,000???

thegolfer

nino1 wrote: »

I will be hoping to agree a set return.
I think a 33% share of the profits is not realistic for a silent partner.

would a 10% return be considered reasonable?

If I would pay him back €55,000 each year for 10 years he would get back €550,000 for his €500,000???

Very roughly that €550,000 represents a Return of less than 1% annually....Unless he's minted, I don't think he'll accept that.

A 5% loan over 10 years with a bank repays about €63640 annually. Total repayment €636394.

You'll have to have a very good chat...

nino1

thegolfer wrote: »

Very roughly that €550,000 represents a Return of less than 1% annually....Unless he's minted, I don't think he'll accept that.

A 5% loan over 10 years with a bank repays about €63640 annually. Total repayment €636394.

You'll have to have a very good chat...

Thanks!!

wanted to have a better idea of figures before meeting.

Glad I asked!!

nino1

how do you calculate what a 10% return on €500,000 is over 10 years?

thegolfer

A bank loan over 10 years at 10% provides for €6,607.54 monthly repayments, €79,290 annually., and total repayment €792,905.

This is a standard loan calculation available on any website.

I think you have to consider talking seriously to your business partner\investor. There are no projections, no plans and the accountants will see similar issues.

nino1

NP margin is 18% which gives a year NP of €270,000.

if i get loan from bank at 6% for €1,000,000 gives yearly loan repayment of €133,200

10% to investor for €500,000 gives yearly repayment to him of €80,000

total yearly NP €270,000 total yearly repayment of €213,200.

Is it that simple that repayments can be made from net profit or more complex than that?

thegolfer

A bit more complex than that..

Some basic assumptions and a little bit of stretching the imagination.
Sole trade\partnership, thus exposure to personal tax rates.
No other loans in the business


Net Profit € 270,000
Less Interest €(60,000) year one 6% on € 1,000,000
Less Interest € (50,000) year one 10% on € 500,000

Net Profit € 160,000
Tax € (56,000) assuming an average 35% tax rate
Net Cash € 104,000 to the business

Loan 1 Repayment € 73,200 being € 133,200 less € 60,000 interest
Loan 2 Repayment € 30,000 being € 80,000 less € 50,000 interest

Net Cash € 800 being € 104,000 less € 103,200

Interest is tax deductible, however the capital element of the loan is not.

This is a very very basic cash flow....

Things look very tight, when displayed above.

Leaves no room for personal drawings etc, or additional loan repayments if the business needs to invest in additional equipment etc.

Without further knowledge of the business its very difficult to predict future outcomes.

If the business sector provides extended cash terms to customers, and creditors are on 30 days, then cash flow will become tight, very tight.

However these are basic observations, and circumstances may be slightly different depending on the sector...

Talk to your accountant and tax adviser....

nino1

thegolfer wrote: »

A bit more complex than that..

Some basic assumptions and a little bit of stretching the imagination.
Sole trade\partnership, thus exposure to personal tax rates.
No other loans in the business


Net Profit € 270,000
Less Interest €(60,000) year one 6% on € 1,000,000
Less Interest € (50,000) year one 10% on € 500,000

Net Profit € 160,000
Tax € (56,000) assuming an average 35% tax rate
Net Cash € 104,000 to the business

Loan 1 Repayment € 73,200 being € 133,200 less € 60,000 interest
Loan 2 Repayment € 30,000 being € 80,000 less € 50,000 interest

Net Cash € 800 being € 104,000 less € 103,200

Interest is tax deductible, however the capital element of the loan is not.

This is a very very basic cash flow....

Things look very tight, when displayed above.

Leaves no room for personal drawings etc, or additional loan repayments if the business needs to invest in additional equipment etc.

Without further knowledge of the business its very difficult to predict future outcomes.

If the business sector provides extended cash terms to customers, and creditors are on 30 days, then cash flow will become tight, very tight.

However these are basic observations, and circumstances may be slightly different depending on the sector...

Talk to your accountant and tax adviser....

thanks for all your help.
i really appreciate that.

one last question if you dont mind.
is the 35% tax assuming its a sole trader business and does that change to 12% for limited company?