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Thread: How does profit share work in this instance

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    How does profit share work in this instance

    Hi All. I am very new to this, so please bare with me.

    I am in the process of joining a business. Lets for ease call this company DC Trading. The company is a PTY and currently is owned 100% buy one person.I currently work for a listed corperate company. Dc trading does alot of work for the company I work for currently ( 90% of his order book). The reason that I have been offered to go into business with DC trading is that they would like me to get new business.

    originally, I was going to buy 30% of the business, however this has changed as it would cost me too much. The idea now is as follows: I will join the company as an employee, recieve a salary with benefits and buy 10% equity in the business. This is where it gets tricky...we are then going to do a 60%/40% profit share in my favour on any NEW BUSINESS that comes in through me. My questions are below:

    LETS PRESUME THAT FOR THE NEXT FINANCIAL YEAR, DC TRADING TURNS OVER R50 000 00, HAS A GROSS PROFIT OF R30 00 000 AND NETT PROFIT OF R600 000 ( FIXED COSTs of R2400000 for the year INCLUDING MY COST TO COMPANY OF R30000.00) -THIS EXCLUDES ANY NEW BUSINESS I BRING IN
    NEW BUSINESS TURNS OVER R1000000, HAS A GROSS PROFIT OF R600000.00 AND NETT PROFIT OF R240000.00 ( ONLY FIXED COSTS RELATING TO THIS NEW BUSINESS IS MY COST TO COMPANY OF R360000.00- ALL CURRENT FIXED COSTS FOR DC TRADING REMAIN THE SAME)
    THEREFORE - 60% OF R240 000 = R144000 for me and 40% of R440000.00 = R96000 goes to the other partner?
    QUESTION 1.

    Provided that DC TRADINGS monthly fixed costs only go up by my cost to company ( R30000.00 per month) and nothing else increases, is the profit share as calculated above correct?

    QUESTION 2.

    Must a percentage of the new business income pay towards the fixed costs of DC trading?What percentage must this be? The new business is allready deducting the cost to company of myself but should it still have to contribute towards the company as a wholes fixed cost?

    sorry for the long winded message. Hope someone can help!

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    Diamond Member HR Solutions's Avatar
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    You have mixed things up there but u are more looking at no 2. Will try to answer properly when I gave more time unless someone else beats me to it
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    Diamond Member Blurock's Avatar
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    Best is to clarify it from the horse's mouth. Let them put it in writing and then analyse and ask all the questions that you can to confirm that there is complete understanding. Only when completely satisfied and gone over by a good accountant or useful attorney, do you sign the agreement.

    One of the biggest mistakes that we make is to take things for granted. We agree to do something together and just assume that the other guy will perform a certain task without putting it in the contract. In the meantime he assumed that you were going to do the dirty work. It is like sharing; one for you, two for me. One for you, three for me, and so forth.
    Excellence is not a skill; its an attitude...

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    Thanks so much. No one has beat you to it yet....look forward to your reply.

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    Joining a business is on thing and I will let those in the know answer your original question.

    One suggestion from my side would be to ensure you have a clear plan/exit stategy of what happens if things don't go according to plan.Rather sort this document out while things are still going well.Hopefully you will never need it but it is a very good thing to have if things do go pear shaped and things do go pear shaped when money is involved.

    Good luck

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    Hi HR Solutions. Have you managed to look more into my question?

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    Site Caretaker Dave A's Avatar
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    I'm with Blurock - at the end of the day you had best get this clearly agreed in advance with your future partner/employer.

    As a matter of curiosity, as part of this deal are you resigning from your current employer?
    The trouble with opportunity is it normally comes dressed up as work.

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