Profit sharing. Small business. How much is fair to ask for?
August 27, 2017 9:12 PM   Subscribe

I am the operations manager/lead technician of an automotive repair shop that is entering the adolescent stage of business. What percentage of the profits should I ask for? How often should it be paid out - weekly, monthly, quarterly?

Five years ago, while I was preparing to open my own auto repair business, I was given the opportunity to become operations manager/lead technician at a brand new auto shop that was being opened by a well established (43 years) mom and pop type company in an affluent town.(The existing company is a heavy duty truck repair business.) The owner of the family run company had a re-conditioned facility equipped with brand new state of the art equipment basically ready to go. All that was needed was the right individual (that is where I came in) to run it and essentially open the doors for them and make something out of nothing. By nothing I mean, there was virtually no clientele, no additional employees and no cashflow to hire any employees initially. I should add that they searched for over a year for the right person. Since I was already gearing up to open my own place, I decided to take a chance on this opportunity with the logic that I would be able to learn all about a startup on someone else's dime. The salary was a respectable increase from what I was currently earning, and I was basically given almost total freedom to make business decisions plus the funding to do so. It was a no brainer at the time. Upon taking the job, it was verbally agreed that after a few years (we speculated five years) when the business started turning a profit that we would come to some sort of an agreement regarding the sharing of the profits.

We are now coming up on the five year mark and as predicted the business has started to turn a small profit. It will soon be time to negotiate some sort of profit sharing arrangement.

Here are the facts -

-The business is a great success in that our customer base is solid and growing. Customer satisfaction is very high.
-I have been given near carte blanche regarding everything involved operating and growing this business since day one - company vision, operations, customer relations, hiring employees, quality control, marketing etc… I was basically given a business to make my own without any risk whatsoever.
-The clientele did not exist before me and the owner has absolutely no relationship with them at all. I am the face and the lead technician of the business, in fact most people just assume that I am the owner.
-The owner is extremely particular in who he chooses to work for him so he claims that he would most likely close the auto repair shop if I were to leave my position. He often gives me verbal praise on what a great job I am doing.
-He has always set me up for success since day one and has never ever given me a reason not to trust his word. He is old school and his word is more important to him than any dollar amount.
-It has been discussed that I eventually may want to purchase the business from him however, right now that is not an option, nor is becoming a legal partner.

Should I ask for a percentage of the gross sales (like a sales commission) or a percentage of the profits?

How much should I ask for? What is fair considering that I have not financially contributed to this establishment? Does that matter? It is my time, sweat and endless strategy planning that has led the business to the place it is now. I also am aware that the owner is most likely looking to recover the money he has laid out of the last five years when the business was not turning a profit.

How often should it be paid out? Weekly-monthly-quarterly?

Any advice on how to verbalize the amount I am proposing would also be appreciated.

I am hoping to hear from employer and employee side of the issue.
Thank you all in advance.
posted by shades to Work & Money (4 answers total) 1 user marked this as a favorite
Why is becoming a partner in the business not an option? An arrangement where you begin building equity in the business over time is mutually beneficial, right? You can negotiate this based on the current value of the business and the growth of the value over time. Otherwise, the clock is ticking for when you leave to start your own business and the owner has to close down-profit sharing only hastens that timeline. You seem to have a lot of leverage here, and will want legal and financial professionals on your side no matter what.
posted by Kwine at 10:29 PM on August 27, 2017 [3 favorites]

Do you make the decisions on investments as well? Marketing? Where does your responsibility end? That's where you should get compensated from.

Usually draws like this are monthly.

Do you know what their total investment is i.e capital + accumulated losses? And what their current return on that is?
posted by JPD at 3:35 AM on August 28, 2017

Why is becoming a partner in the business not an option?

Kwine asks a key question. Yes, you could negotiate $X (even if that is a function of X% of something) in profit sharing. But, putting that same amount toward acquiring equity in the business will produce much greater returns over time.

If the owner is open to letting you acquire equity, your first step is a valuation of the business. That gives you a baseline for calculating the amount you would ostensibly pay for X% of equity.

At that point, you and the owner can be as creative as you want when it comes to the process and timeline for your acquiring equity. Along the way, you might want to get ideas from a business broker (who has likely seen hundreds of these arrangements) and/or an attorney. You should probably get your own attorney so you can make sure YOUR interests are being represented.

One thing to watch out for is to lock-in the "per-share price" (or however you calculate the value of the equity) over the time period of your purchase. If you keep doing the good job that you're doing, the value (i.e., "per-share price") will rise over time. You do not want to be stuck paying a higher price for value that you were solely responsible for increasing.
posted by John Borrowman at 11:20 AM on August 28, 2017 [1 favorite]

I would ask for a bonus, not for "profit-sharing," beginning this year, and would consider asking for shares (assuming the business is incorporated) to be issued over the next few years. The bonus would reward actual profits recognized, and the shares would reward your contribution to the overall value of the company.

Becoming a minority shareholder would be a variation on "becoming a legal partner" but would not surrender the owner's control over decision-making. But it sounds like he relies on you to make most of the important decisions at any rate.

How much? No one here can know for sure, but a range of 10-35% of profits as a bonus, and 5% of shares per year for 5-8 years would be one reasonable-sounding approach.
posted by megatherium at 6:57 PM on August 28, 2017

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