Structuring a partnership agreement for a gym startup
- posted by: Jay on 2017-10-02
- tagged:
business-model, partnership
- score: 0
I am a 30 year old fitness trainer. I have worked in 5 gyms in the last ten years and I would consider myself a technically strong trainer. Offlate a very close friend of mine proposed that we should start a gym together and that he would fund the entire capital required. These were his terms -
- Let’s say the capital amount is 10,000$
- He is receiving an unsecured loan with a high-interest rate of 20% per annum.
- He expects us to start repaying the loan in 6 months, on a monthly basis. So say, 2000$ is the interest, it would be 167$ in interest plus say, 500$ of the principal. This payment would be counted as operating cost.
- Other operating costs would involve paying other trainers, utility bills, taxes, and equipment maintenance.
- He proposes 50% share in monthly profits after we take care of all the operating costs. So let’s say the gym makes 2000$ this month, 1000$ is operating expenses, then I would make 500$.
- He expects me to not include my salary as part of operating costs.
I see many problems with this deal -
- My friend is a passive investor in this deal. He is only going to invest money.
- As an investor, he is expecting the return on his investment too quick (6 months).
- If the gym doesn’t do well or barely makes even, then I do not make any money for the time I spent as a trainer/manager/marketing person. I have a family to feed.
- My friend says I am a 50% partner in liability too. So, say the gym doesn’t do well, we have to sell of the equipment and whatever loan amount remains, I would have to split the repayment of it.
- I would be the only owner taking the bottom line for function and growth of this gym. I have strong pubic relationship in my area and I am a trained professional.
- I intend to build this gym as a brand - If the gym does very well and If I have to expand in two years, I can potentially secure a bank loan at lower interest rate, but I would have a 50% partner who essentially brings nothing to the table and has to be tagged along just because he invested 50% in the first gym and is a part owner of the brand.
Now, I have no money of my own to invest in a brand new gym. I will not receive a bank loan because I have nothing to plead as collateral. So, an investor who believes in my skills, professionalism, honesty, and integrity is my only way to realizing my dream of building my own gym.
So, here are my questions (I am novice in business management and this is my first business deal) -
- How bad is the deal that my friend is structuring?
- Is it not financially/legally incorrect to split profits whenever the gym makes a profit? Wouldn’t it make more financial sense to re-invest the profits the gym makes back into the gym? Or invest it in other market-linked investments?
- Typically, if an angel investor funds your company, do you give up so much equity? especially, when the investor is nothing bringing anything to the table other than money.
- Isn’t my friend short-sighted in his expectation of ROI?
- Let’s say a bank did fund my business, I would be a 100% owner and I wouldn’t have to give up any equity. But when my friend funds the business, I have to pay his ROI plus he has access to the entire profit the gym is making and take out the money from the gym whenever he wants.
I am thinking about structuring the deal this way:
- I will be taking a salary as part of operating costs, which will be reviewed every 6 months depending on gym growth. My friend will receive ROI starting in 6 months on a monthly basis.
- The profit the gym makes will be reinvested in the gym / other investments.
- My friend should be happy that for the funding he is doing today, he is going to make a 20% return starting in 6 months and has 50% stake in a future gym chain.
- I plan to include a buy-sell agreement which would set conditions for him to sell out his equity to me, should he decide to move on after he receives full ROI on his money.
Do you see an issue with the way I am structuring the deal?
Answer 13448
- How bad is the deal that my friend is structuring?
Loan sharks offer better terms.
- Is it not financially/legally incorrect to split profits whenever the gym makes a profit? Wouldn’t it make more financial sense to
re-invest the profits the gym makes back into the gym? Or invest it in
other market-linked investments?
Yes, it would make more sense.
- Typically, if an angel investor funds your company, do you give up so much equity? especially, when the investor is nothing bringing
anything to the table other than money.
No.
- Isn’t my friend short-sighted in his expectation of ROI?
Yes.
Do you see an issue with the way I am structuring the deal?
Yes. Structure the deal as an IOU. And try to get a loan from a bank first. You’ll almost certainly get better terms. And try to ask your close friends and family for yet other alternatives, too.
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