Thursday, October 14, 2010

Starting up a company at the age of 50 years

An old friend (Allan) wanted to be free from office politics and to start his own company at the age of 50 years.

He asked me for advice on his proposed event management company start-up with two trustworthy partners (Brian and Charlie). All 3 will have equal shares in a private Limited Company. Since he would be the one bringing in most of the business via his old clientele while the other two provides administrative and backup services, all 3 agreed to the respective following distribution of profits at 40:35:25 with Allan getting 40%. There will be no salary for the first 3-6 months. After 3 months, all 3-6 months, all 3 will get a salary based on 40:35:25 formula every month.

MY QUERIES
1. How much are Brian and Charlie earning now? Brian is unemployed, having left his food and beverage (F&B) hotel job in Vietnam. Charlie is earning around $5,000 a month as an employee in the F&B business.

2. What amount of revenue can Brian and Charlie generate? Practically none. They just provide the support services as they do not have business development experience or important decision-making clientele to generate business.

3. Is Charlie an IT expert? He has some information technology (IT) knowledge but is not an IT experienced. Therefore he has no valuable contribution and in any case, an event-management business does not depend mainly on IT skills and expertise.

MY OPINION
1. Brian and Charlie have 66.6% of the shares. In any company resolution, they can out-vote or frustrate Allan's plans for the business expansion or changes. Allan will be unhappiness when they do that since they don't generate income and are more like "sleeping partners".

2. Since Brian and Charlie will not be generating income, they are not worth being given 35% and 25% of the net profits.

3. What happens if Brian and Charlie find better job prospects since they don't get salaries for the first 3-6 months? Or they take long leave, die or become sick? They still get their 60% every month as agreed, assuming the company is profitable.

4. In the end, Allan will feel very unhappy as he brings in practically 100% of the revenue and gets 40% of the net profits. If he is that good, he should be getting the lion's share of the profits.

Getting in the business and sustaining the profitability of any business is extremely hard work while administrative services can be outsourced. If the business really generates $6 million in revenue as projected by Allan, there is no problem employing good people to do administrative work. Of course, Allan must be involved in ensuring that the accounts are properly kept.

CONCLUSION
Allan should be getting the controlling share of at least 51%. There are the operating costs to think about.

I know Allan has the clientele and can generate the $6 million revenue he projected since he is battle-tested for the past 30 years. He is now around 50 years old. He had started up two small businesses before and knew success in earning big money is not guaranteed. That was why he worked for others as there is a steady income every month.

With a large clientele who trust him, he ought to have the confidence to start up small. He needs to change his mindset that there must be a big office, top IT facilities and supporting staff as in established event management companies to be able to succeed as an entrepreneur.

He had seen too many people failing in businesses and that was why he worked for hotels and resorts for the past 30 years as an employee. There will always be office politics in corporations from employees and if he really can bring in a $6-million event management business, I don't see why he cannot be successful on his own now that he has been "battle-tested".

A better business model will be to give Brian and Charlie a commission based on each project they successfully completed. If they can't do the project, there are many others who can be out-sourced to do it. Otherwise, they still get paid a combined 60% of the net profit every month. This is a large amount if the revenue generated is $6 million a year. Assuming conservatively 5% as net profits, the income will be $300,000. Allan will get $120,000 but his non-income generating administrative partners making the connections get $180,000! He will not be happy to continue the business relationship and there will be nasty feelings when the business breaks up.

The $180,000 can be used to employ good energetic people who have been battle-tested in the getting more business deals. In business, it is how much profits you can generate for the company, not how good your administration is. Without income, top companies close down even though they are well administered. An ability to bring home the bacon is what counts in business start ups, whether one is a private veterinarian opening his veterinary clinic or an event manager.

P.S. "Bring home the bacon". Singaporeans generally don't eat bacon and eats for breakfast unlike the English and so may not appreciate the title of the story. I studied in Glasgow in the late 1960s and my favourite breakfast in the hall of residence was bacon and eggs. "Bring home the bacon" means to "achieve desired results or have success" in this story.

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