The lawyer I spoke with who told me about profit-sharing partnerships also suggested a second idea that could help us get professional help and also save money: offer a retainer.
Hello and welcome to the second part of this two-part blog post all about assembling a business team on a shoestring budget. The big idea in the first post was: Instead of hiring professional help to perform professional services for a certain fee, bring them into your business as a partner, and exchange their work for a percentage of your profits.
The lawyer I spoke with who originally shared the idea of business partnerships with me gave me an example of how I might make an offer to bring him on as our business partner. He said I could offer him 5% of our annual profits or $5000, whichever is greater over the course of one year.
So Nathan and I did some math using the lawyer’s example offer and realized that unless we make over $100,000 in PROFIT our first year, $5000 would be greater than 5%, so we would owe him $5000.
We are not anticipating having much profit at all in the first year, so in order to give the lawyer a reasonable payout of our profits in exchange for a year’s worth of his service, we'd probably end up needing to offer him over 50% of our profits, and that is definitely NOT something we’re going to do. So the profit-sharing idea most likely won’t work out for us right now.
But he had still suggested paying him a flat $5000 in case our profits were small. To figure out if $5000 would be a good price for a year’s worth of his services, we needed to figure out how many hours of billable time we would need from a lawyer.
After some thinking, we came up with 16 hours of billable time for legal services in our first year. The three lawyers we spoke with had rates ranging from $150/hr to $200/hr. This makes the potential cost to us $2400 to $3200 for 16 hours of work during our first year, and shows that $5000 is more than we would owe if we just paid them by the hour.
After putting all these numbers on paper, we realized that it would not be financially advantageous for us to bring a lawyer onto our team as a business partner. Also, considering the problems a bad business partnership could cause, and realizing our own “green”ness and Natril Gear’s resulting vulnerability, we decided that keeping the professionals we work with at arm’s length was the best relationship for us at this time. Later, when we know these professionals better and Natril Gear has more profit to work with, we may reconsider.
But the lawyer I spoke with also suggested a second idea to save money and still get professional help: offer a retainer.
(Hey, I'm trying really hard to find pictures for the blog! This picture got points because I've never seen anything like this in my LIFE, and it IS kinda-sorta related to what I'm talking about. :-))
A retainer is a monthly fee that we would pay in return for unlimited availability and work from the lawyer, typically for a period of at least a year. He would not be a business partner, he would be a hired professional. To calculate the retainer fee, we would figure up all of the expenses we think we would incur over a year's time, and then divide by 12 to get the monthly amount. For example: we predicted needing about $3000 worth of services from a lawyer, so if we offered them a one-year retainer, we would pay $250/mo for a year, and get unlimited access to their services for 12 months. You can think of retainers like "budget billing" for your utilities or like the fee for your cell phone – your usage changes, but your bill stays the same.
The advantage to retainers is that you can get unlimited access to professional services and you can have a predictable monthly bill. The disadvantage is that for a new small business, there is no way to tell how much of any service we'll actually need because we have no history of using any professional services. Also making long-term financial commitments is not smart right now, because we have no cash-flow yet to assure that we'll be able to continue to pay.
A third idea that our lawyer did not mention but we also talked about are fixed contracts. This type of contract would put a price on a specific job or time frame. This would not lock us into a long-term relationship like a retainer does or involve giving away our profits like a profit-sharing partnership does.
The lawyer that Nathan and I have chosen to work with is actually not the lawyer that originally gave me these partnership ideas, but a different lawyer. She agreed to do all the work required to incorporate us for a flat fee instead of an hourly fee. This is an example of a fixed contractual relationship. We are planning to do all of our legal business with her, and are interested in possibly using this method for the rest of the legal work we predict Natril Gear will need as well (those 16 hours I mentioned earlier). This way, we can assure her of our business (good for her), and we can have professional help doing the things we need to have done (good for us) while knowing the exact cost before we start a project (good for budgeting), and avoiding a long-term financial agreement (good for our limited cash flow).
After thinking through fixed contract relationships, retainer relationships, and profit-sharing relationships, it seems that they each have a lot of potential in a business setting, both to control cash flow and to get great work. These are the types of business relationships we would like to form when possible, but we also think that there are times it will be best to just have projects done for a good, old fashioned, hourly rate.
After our discussion, Nathan and I thought through each of the various professionals we wanted as a part of Natril Gear’s team, estimated the hours/dollars worth of work we needed from them, and considered which of the four payment/partnering methods would best suit each relationship. At this stage in our business, we came up with the following breakdown:
KEY: * = May move to "Profit-Sharing". ** = May move to "Contract"
We are not planning to form relationships with all of these professionals yet, but if/when the need arises, this is our plan of action.
I hope this has been helpful and insightful to you as you think about business relationships, payment options, and which plan suits your needs best. Do you know of any other ways that we could form business relationships with the professionals we would like to work with? If so, I'd love to hear your ideas!