BEANO CASE QUESTIONS
1. Harris’s partnership proposal is not fair for Smith. He completely revised the original investment amount and loan deal that they had original discussed. He is asking to raise his share to 49%, which would pose many problems for Smith in the control of the company. Giving Harris that high of a stake in the franchise would be giving him a lot more money, and half of the control. Smith would be dependent on Harris, and if something suddenly happened to him, or the deal didn’t end up going through, then Smith would be out of business. His SCORE counselor recommended that he does not give up more than 20% share to one investor, and this is above and beyond that. He is also asking to be paid back his full loan of $95,000 over the first five years. This is completely unreasonable, since it is a brand new company and they will not be returning high profits in those primary years. With that expectation, Smith is expected to not only pay back his SBA loan, but also an extra $19,000 per year, with an added prime rate of interest, to Harris. With estimated incomes of only $41,000 after their first year in business, his entire salary for the year would be $8,695. Not only that, but Harris would get his loan back in five years, plus an extra $111,867. This is an extra 22 times the amount he put in, while Smith would be left with close to nothing.
2. Even though the estimated net incomes are increasing at a steady pace, it will take him at least five years to get to an average salary point around $60,000. Even then, he will have his SBA loan and Harris’s personal loan to pay back, which would be a huge detriment into his salary. It would be much more rewarding for him if he could come to a negotiation with Harris as an investor, or find a new investor all together. This way he could pay off his loan over a longer period of time, and maybe not give up a lot of his control. With the equity stake and loan that Harris is...
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