Me and a friend are going to buy a business together where I'm putting in 100% of the £100,000 buying fee as well as a few £thousand to update the premises.

My friend is going to be the sole director and will be running the business day to day and drawing a salary. He is not investing anything into the business (currently he has no means to). I have agreed to be a shareholder but not a director of this business. I will not be drawing a salary but I will be taking a dividend at the end of each financial year.

My input is going to be the financial backing of the firm (obviously) but we've agreed I will also have an input into the medium and long term goals of the business.

We've agreed to go 50/50 on the net business profits but that my initial £100,000 investment should paid back to me as quickly as possible.

My question is: How should I structure the business to make it fair on all parties but protect my financial interests?

Obviously being friends helps, but I've seen too many times when business partnerships go sour and former friends end up having a massive falling out and getting very messy in the courts.

I've thought of a coupe of things:

1) Perhaps I could become a majority shareholder with maybe a 90% - 10% split in favour of me and then having an agreement in place that my shareholding will reduce by say 10% every year until we reach an even 50-50 or that I've been paid back my £100,000 whichever comes sooner.

2) Have a clause in place that says if either party wants to sell his shares, he must offer first refusal to his partner before he can sell them anywhere else. I'm not sure how this works in practice, but it seems

3) Can there be some written contract put in place that specifies who exactly is in charge of the company and who is responsible for the day to day running of it? The main reason why I do not want to be a director is that I have my own businesses (run by me solely) and don't want to risk jeopardising these. The new business is located about 100 miles from where I live so I'll not have a day to day clear focus on what is going on or what actions my new business partner is taking. Therefore I've agreed to be a shareholder only to limit my liability in the event that something goes catastrophically wrong.

Obviously both my friend and I will take separate legal and accountancy advice before we draw up an agreement and sign it, but I'd be grateful for some friendly pointers from any experienced business types on here.

I agree with Justin - your proposal is foolhardy (sorry!).

All your points re relationships between shareholders etc can be drawn up in a Shareholders Agreement.

I would suggest some future targets are agreed between you which trigger bonuses, share issues etc.

If you think that he has to have shares at the start, you should categorise them - perhaps your funding should be for redeemable preference shares or a formal loan note with contractual repayment terms and the 2 of you hold "A" and "B" Ordinary shares which can be set-up with different voting and dividend rights.

Hope that helps but you do need to get advice.

David

Firstly, forget this person is a friend.

I know plenty of people who have gone in to deals with 'friends' with loose agreements set up and come out totally shafted.

If one thing can stop you being friends it is a business.

Make sure you have control from the outset as you are the one risking your money.

How about you are both directors so that both signatures are required for any significant changes in the business? So you will always have a say...
If it is possible, you can draw no salary while friend (lets call him Bob - helps me); Bob draws minimum wage.
Shares can be split 50 - 50 as long as you are down as the main creditor (I think I have used the right term here); so if it goes wrong, legally your money will be paid first. That way, there is motivation for the business to do well, keeping in mind that unless a significant portion of the debt is paid, you could veto a dividend.
Good luck.
-FV

Shareholders get very little when a ltd co goes tits up.

Since creditors usually get pennies in the pound, safe to assume shareholders will get nothing.

Get some good legal advice and make sure you get a contract signed up with him.

Also - why don't you either -

Let him take a 'tax efficient' minimum salary and pay the rest to him as divi - this way, the harder he works/more efficiently he runs the business,the more your co. makes, the more he gets paid....

Pay him a % of his salary as shares based on %'age of profit? that way he re-invests into the business (or at least your pocket as the major shareholder) and you therefore protect your investment.

I got bitten very badly by a bloke who was in your position, but wanted me to put up ten grand startup capital (we had a small consultancy) AND do all the work. He basically treated me as his under-ling as he had the most to lose. (he even desribed me as his 'assistant' - fking tt)

Needless to say, I took out my startup as directors loan and we parted company (as it were). Nasty business but it taught me a lot about trust.

Good luck

Sorry - totally missed he was buying a business - thought he was setting one up from scratch.

I wouldn't put £100k into a business like this without wanting more control of it....if you aren't willing to be a director why are you putting £100k into it ?!?! I know there are risks to being a director but surely those risks are pretty similar to investing £100k.

With a company myself and two other friends invested in we insisted on getting a directorship to represent our interests and also insisted on certain things like major capex, hiring etc to be signed off unanimously by the board.

How about you get paid back the same rate he takes in salary:

Then, if he wants to earn the big bucks, the business needs to be successful enough to pay his salary twice - once to him, and once to you in repayments.

Sonds like a totally lunatic arrangement at the moment.