Introduction
The new purpose by Harris is not at all a fair deal for Smith, as it will jeopardize Smith's control of the company and decrease his personal income, which will be less what he could have earned if he has stayed at his corporate job. I will recommend Smith to give Harris a counter proposal, and start seeking harder for multiple new partners.
Analysis
As Smith's SCORE counselor recommended, Smith should not give up more than 20% share to an individual investor, and the best way is to obtain two partners to check and balance their power while making sure that the mastership is still in still in Smith's hands. An equity position 49% of the franchise will give Harris too much power to control and a lot of money, causing Smith to be …show more content…
According to the numbers listed in exhibit 8, the estimated total distribution for the first 5 years is $321,800. If we subtract the loans that should be paid off in five years if Smith took the deal from Harris, which is $95,000 to Harris and $120,000 to SBA loan, leaving less than $106,800 left for the two to divide, since Harris also demanded a interest at the prime rate. As Smith owns 51% of the company, his total earning in five years is $54,468, while Harris not only gets all of his loan back, he also puts in only $5,000 and gets $52,332 in return, an extra 10.5 times of what he had …show more content…
Under this scenario, Smith average annual income for the first five years will be $60498.4 ($321,800 * 94% / 5), which is slightly more than his corporate job. Unfortunately Smith is already having a hard time finding investors, and the chances of Smith finding investors that will grant this deal is close to nothing. Also, Smith is taking the risk that the company may go bankrupt when he choose to open a franchise with Harris, which in that case he will have to pay back $215,000 in loans. Financially speaking, I would argue that forgoing his corporate job is a wrong and risky move that greatly decreases his annual income, and would like to suggest that Smith should consider go back to his corporate job instead of starting a franchise with
The new purpose by Harris is not at all a fair deal for Smith, as it will jeopardize Smith's control of the company and decrease his personal income, which will be less what he could have earned if he has stayed at his corporate job. I will recommend Smith to give Harris a counter proposal, and start seeking harder for multiple new partners.
Analysis
As Smith's SCORE counselor recommended, Smith should not give up more than 20% share to an individual investor, and the best way is to obtain two partners to check and balance their power while making sure that the mastership is still in still in Smith's hands. An equity position 49% of the franchise will give Harris too much power to control and a lot of money, causing Smith to be …show more content…
According to the numbers listed in exhibit 8, the estimated total distribution for the first 5 years is $321,800. If we subtract the loans that should be paid off in five years if Smith took the deal from Harris, which is $95,000 to Harris and $120,000 to SBA loan, leaving less than $106,800 left for the two to divide, since Harris also demanded a interest at the prime rate. As Smith owns 51% of the company, his total earning in five years is $54,468, while Harris not only gets all of his loan back, he also puts in only $5,000 and gets $52,332 in return, an extra 10.5 times of what he had …show more content…
Under this scenario, Smith average annual income for the first five years will be $60498.4 ($321,800 * 94% / 5), which is slightly more than his corporate job. Unfortunately Smith is already having a hard time finding investors, and the chances of Smith finding investors that will grant this deal is close to nothing. Also, Smith is taking the risk that the company may go bankrupt when he choose to open a franchise with Harris, which in that case he will have to pay back $215,000 in loans. Financially speaking, I would argue that forgoing his corporate job is a wrong and risky move that greatly decreases his annual income, and would like to suggest that Smith should consider go back to his corporate job instead of starting a franchise with