Please help with business deal proposal?

Question

I'm not sure where to post this, but I'd like some advice on a business proposal that a couple friends of mine are proposing to me.
A little background info: I've been invited from a couple guys I know to get in on a ground level opportunity for a start-up that they're going to be launching soon. The business itself is an advertising firm that these two guys have started and have asked me to become part of by investing (50K) and taking charge of a certain local regional area called city X. The main purpose of the new start-up is to give all the businesses in the area an online presence and offer packages for them to advertise they're products and services. They are planning on launching the same thing in a nearby city as a pilot, but I will be in charge of city X and a percentage of all income generated from city X.

The gist of it is they want me to pay 50K to have rights to the income generated from city X, plus a quarterly maintenance fee of 15% of gross receipts.

Is this ok?

Answer 1

That's a tough question. I think you should get more details. First, do they have a written business plan? This should detail the type of clientelle they are looking for, expected revenues, and so on. Also, if these individuals are simply doing online advertising, what sets their firm apart. Why would a prospective client go with this firm? Why would you go with this firm if you were advertising? If you like the answer that you come up with, then maybe you will want to get involved. Either way, I would find out how much each of the other two is investing, and what your investment money is going for. In my opinion, this sounds a little suspicious. Seems like you have to invest an awful lot of money and still do a decent amount of work to receive the percentage of income. If this is an online based business, I don't see the costs being that high. It doesn't seem like they would absolutely have to have a building and such to work out of. Make sure they are not trying to start too big. Better to start small and limit your risk than start big and fail spectacularly.

Answer 2

Sounds like a franchise but without the successful brand name behind it. Why would you put up cash when there hasn't even been a successful pilot scheme? Wait to see how they get on, then if it all looks good there is no problems proceeding. You'll probably have to put up more money as it will (hopefully) involve less risk but then again currently its a bit of a punt.

Another issue I'd have with it is that you are being asked to get involved at ground level yet not being offered any equity in the company.

What sort of market research have they done? Is there a market in City X for this product? With $50,000 could you not do it yourself? i.e. what are they actually providing you with?

Devil's adovacate the idea with them and see if it stands up, see how you feel about it. It's a lot of money (for most people), so no need to risk it unless you have no doubts about the plan.

Answer 3

honestly I think the business will fail. Most successful businesses are already on-line. If they are not they probably no longer in business anyway. If they are there probably aren't many left. I would reconsider.

Do these guys have a college education? Do they have extensive experience in business? This sounds like a bad idea.

You are not receiving any form of ownership? They convinced you that you are entitled to city X income only?? You are being scammed and used.

Answer 4

First of all work out the value of their business in the mentioned city X and divide it by 3 to know how much u shud be payin in order to become an equal partner.
If they are starting afresh in that city then try to know how much they are investing for that region/city X so that you could calculate accordingly how much percent of profit you shud be getting.
If that 50K sum will be put to begin the business itself, then try to know how much those guys r putting in so that you could work out a percent of income which you should get from the TOTAL BUSINESS INCOME (not only from city X).
Basically whatever the case is, you need to find out whos putting in how much and for what. If your are putting for city operations then expect income share from city operatons, if you are puttin money for main company(head office thing) then expect income share from total income of the company and so on.