Legal Question in Business Law in Washington

Re: Becoming co-owners

Caution! Investing in the business of a friend often results in a broken friendship.

What percentage of the business you will own depends upon what is agreed with the present owners (who I assume are shareholders, directors and officers all rolled into the two of them.) Important questions to think about are as follows. Are you going to be actively involved in the business or passive investors? How much have they invested in the company so far? Why are they preferring additional investors rather than simply looking for a lender? Are they going to be investing "sweat equity"? (Working without pay or with nominal pay until the company gets going?)

Coming back to my first remark about friends going into business together, such arrangements are not always a recipe for failure. If friends can realize that running a business is still running a business, and even if your business partners are your friends, they are still also business partners and should be treated as such, these arrangements can work. If you think this is your case, here is how to make sure. Ask to see the books, such as they may be this early in the life of the company. Ask to see their business plan. Ask to see the shareholder's agreement that you will sign. If there is no shareholder's agreement (and there may not be one since the only shareholders right now are a married couple, just getting started in the business), ask if they would mind if you had an attorney write a proposed shareholder's agreement. Ask if they have all their licenses in place and if not, when they expect that they will. Ask them what they see as the greatest weakness of their business plan.

If they bristle at these questions, back out now! It means that they see the business as theirs, not as something that would belong to all of you if you invested. By stepping back before you ever invest, you may be able to save the friendship. If they do not want to answer all of these questions in detail and you invest anyway, you are at serious risk of losing both your investment and the friendship, too.

If they ARE ready and willing to answer these and any other questions you may have, get an attorney to assist you with this. You need to be sure that all appropriate disclosures are made to you, and that shareholder agreements are in place that are fair to everyone, especially you. If the business is small and we are not talking about a huge investment, the cost of legal help should not break your budget, and a little legal guidance up front can save lots of legal expenses later

Re: Becoming co-owners

First, I agree with everything the Ms. Beecher wrote in her response, and I would only add the following, as it pertains to your two specific questions.

Ownership percentages are calculated in any number of ways. It depends on how you want to calculate it. For example, if you measure by capital investment, then measure what you put in versus what they put in and you each own a proportional share as it relates to initial investment. This would assume that you are all working a roughly equal amount or otherwise contributing roughly equally to the business.

As to what to pay attention to, I'd say the books and the business plan. Also, before you invest, even if the plan and books look good, spend anywhere from $500-$2,000 to have the business assessed. This will tell you whether the purchase price for your share is commensurate with what you'd pay if you bought into someone else's business in the same industry.

In other words, get an idea of what the going price is for what you are buying. By the way, the range on the assessment comes from whom you use, and how detailed their report to you needs to be.

Also, you mentioned that this is a franchise in homecare. If that means there is a franchisor who granted a franchise to your friends, most likely, before you can take an ownership interest, the franchisor will have to approve this. I'd ask to see the franchise agreement and look at the section that deals with transferring ownership interets. That might stop the deal dead in its tracks right there.

At the end of the day, I suggest you follow these steps in the order I give them to you. First, take a look at the business plan and books to see if it makes sense to you, and you are comfortable. Second, hire a business evaluator/appraiser to tell you if you are paying too much for what you are getting. Third, assuming the first two steps are positive and you are still interested, now hire an attorney to put together a contract or purchase and sale agreement that makes you partners. This is where you'll want to make sure the corporate by-laws are adopted (if not already) and amended if needed. You'll also want to make sure that there are by-laws that deal with how any of you would go about divesting your ownership interest, since you never know when either of you needs to get out.

Bottom line: if you get through the first two steps and are ready to buy, get a lawyer to help you. It will avoid many serious problems down the road when trouble comes- and you must assume that there will be trouble. To assume otherwise is naive and will guarantee that there will be trouble.

Best of luck!