Business ownership percentage in partnership

December 23, 2021

by a searcher in Moreno Valley, CA, USA

Hello guys, how would you come up with a fair percentage in ownership within a partnership. One person has the capital while the other person drove the deal forward. He found the deal, kept communicating with brokers and sellers. If a deal goes through, they would hire an operations manager (although the sellers would stay for minimum a year for transition) because both have a mindset of not working in the company, but overseeing it and helping it grows. What would you think is a fair structure of ownership percentage for both business partners?

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Reply by a searcher
from Tufts University in Jersey City, NJ, USA

The base case here is that the capital is buying the business, regardless of who provides it. If someone is providing 100% of the capital, we start at the base case that they own 100% of the business and then we consider how much (if any) non-capital sweat equity deserves to be assigned to the other "partner" on the basis of work already done and/or work to be done.

Not to disparage the work done by the non-capital partner, but doing the work of a business broker (finding a deal and driving conversation between the buyer and seller) is typically rewarded on a commission basis (percentage of sale) rather than a share of ownership.

Operating a business IS worth equity reward, but it sounds like the non-capital partner here isn't planning on helping with that. High level oversight/advice adds value, but in terms of equity stake that would justify something more along the lines of an advisory stake (1-2%).

Unless there was some prior understanding, I don't see why the buyer (i.e. the person actually providing the capital) should see the deal-sourcer as more than a broker who deserves a cash commission rather than a share of ownership in perpetuity when seemingly their role in the transaction is finished at closing. If they're willing to continue on as an advisor then that's worth equity, but a token amount commensurate with the degree of time commitment.

Reply by a searcher
from University of Texas at Austin in Austin, TX, USA

I agree with Bill and Ron. However, tt would seem that the "finder" partner expects to be more involved going forward given equity expectations? Perhaps we are missing some details as it relates to his efforts thus far, previous handshake agreements, and/or his planned activity post-acquisition.This sounds a lot like many real estate investments where the "money" leverages energetic up-and-comers to increase deal flow. In return the "money" gives the high-energy rookies a portion of the "promote" (effectively a claim to.a portion of the profits). This also happens in other asset classes where the person that brings the deal to the table and raises the funds gets a percentage of the equity that the raised capital can purchase.

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