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04 - The Business Plan Writing & Using a Business Plan

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  #1  
Old 11-20-2007, 02:41 PM
3pointross 3pointross is offline
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Default Merging two companies, how to figure out the details

I am currently in the planning stage of merging my company with a different company that offers very complimentary services. We have worked together on many different occasions and realized that we could reach larger clients and be more successful if we acted as a single entity rather than each our own and buying up each others time.

However we are a little unsure how to structure everything and figure out how it all would work.

We are both single person companies, with part time freelancers for overflow.

My company has been around for a bit longer, and generated more revenue this last year than his... however we plan on taking over his company name because it has a broader reach, where mine focused on one aspect of a range of services.

Because of this we don't know how things should divide up in terms of pay, ownership, contribution of initial capital, etc

Any thoughts, suggestions, resources, would be excellent

Thanks
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  #2  
Old 11-20-2007, 05:07 PM
David Staub David Staub is offline
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I would break down your decisions slightly differently than you did. Your terms may lump some things together and not cover other critical issues at all. For example, "pay" can mean base pay for each of your own respective services or it could include "profit" from the freelancers. "Ownership" can mean share of profits, control of decisions and split of proceeds if you ever sell the business.

I suggest the two of you discuss:

1. How are each of you compensated for the work you bring in to the company and do yourself?
2. How are each of you compensated for bringing in work (perhaps from a company that is currently a client of one of the existing businesses) which is performed by the other "partner"?
3. How are each of you compensated for bringing in work (again, perhaps from a company that is currently a client of one of the existing businesses) which is performed by a freelancer and not touched at all by the other "partner"?
4. How are the two of you compensated for work from new clients, not directly traceable to either of you, when work is done by one of you or when the work is done by a freelancer paid by the firm?
5. How are day-to-day decisions made? Can one of you bind the company or does every action require agreement by both of you? What if you disagree - how will the decision be made?
6. What happens if the business doesn't work out (or working together doesn't work out)?. Will you each take back your own clients? What about clients new to the firm? How will you split up assets (receivables, largely) and liabilities (amounts owed to the freelancers, rent, etc...)?
7. How will you split the proceeds if someone offers to buy the whole business? What if one of you accounted for 75% of the business at that time? Is the percentage fixed forever by contributions prior to the merger or does it change to reflect future contributions after the merger?

My suggestion is to get a good business attorney who will work you to answer these questions (and others that are relevant to your own businesses) and who will draft a solid document reflecting your decisions.
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Old 11-21-2007, 01:04 PM
ana-banana ana-banana is offline
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Staub gives good advice. I've been through similar merges before and you need to have a lawyer come and draft up a contract or agreement between the two of you that addresses all of this. If the merger doesn't work (like one I was involved in) you could get embroiled in some serious court issues.
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Old 11-21-2007, 06:21 PM
SeattleCPA SeattleCPA is offline
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Another thought from an accountant... Perhaps you don't want to merge. Perhaps you just want to partner with this other entity...

E.g., I see more and more people (operating an S corporations) who are entering into partnerships. Multiple partnerships...
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Old 11-21-2007, 10:59 PM
David Staub David Staub is offline
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Steve has a point but it really depends on what your long term goals are. Whether you call it corporate partnering, a joint venture, a strategic relationship or one of the other names, the concept can be applied to many situations. I frequently set up joint ventures (by many names) and have a short article titled "Joint Venture Agreement" on my website that touches on a few of the issues.

The problem I have with a joint venture in this case is mostly psychological. The business issues have to be addressed whether you have one entity or three (the two separate businesses plus the joint venture), but if you are trying to build the business into a single unified business, with shared risks and shared rewards, a single business may be better. In many cases, a joint venture continues to foster the sense of "you, me and us" rather than "us."

On the flip side, if you have serious doubts about the merger, a joint venture can be much cleaner to unwind than a merged entity, particularly when it comes to some tax issues (although the problems are lessened somewhat if you use an LLC rather than a corporation).
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  #6  
Old 11-24-2007, 05:14 AM
mariamarsala mariamarsala is offline
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Default get the most help available.

Do yourself a big favor now. Each of you should go speak to a lawyer and each of you should speak to your own accountant.

In addition to all the great questions that have already been asked, make sure you get a buy/out agreement.

This is not a situation that should be handled lightly. Legal help is the best way to go.
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  #7  
Old 11-25-2007, 09:22 AM
3pointross 3pointross is offline
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Thanks for the excellent advice, I have this all printed out and will be bringing it to a buy/sell coach and my attorney.

Like David said our worries about forming an LLP or any other sort of partnership over a merger is we want to push all for the "together" company rather than push for the together company when it benefits us individually.

The merger really is a whole new realm of possibilities because currently we both offer services that are excellent for small companies and projects, with out a whole lot of room to get out of that situation beyond getting the capital to hire an expert full time instead - which just isn't in the cards this early in the game. So its a great way to build a company that can do bigger and better things if we can work out all the details.
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