Menu

Management Rights Partnerships

The primary reason to enter into a Management Rights partnership is to enable partners to consolidate funds and purchase a much larger complex thus increasing your return on capital employed in the business.

To maximise returns partnerships usually work best if the management rights business being purchased has a net operational profit of $300k or above.

Two key partnerships are usually in play:

1. Working partnership: All partners to the purchase work in the business and share responsibilities and share the profit in accordance to equity contributed.

2. Working partner and Silent partner: One party has the responsibility of running the business and is paid a wage by the partnership to complete these duties. The silent partner is just that silent and does not get involved in the running of the business and only shares in the profit according to equity contributed.

The success of any partnership structure will be the clear establishment of what is required by all parties prior to the commencement of the business venture.

These responsibilities should be negotiated and controlled by legal agreements and there are industry specialist solicitors that can draft these documents.

Percentage of ownership

This will depend on what cash each party is contributing to the partnership and can be in any percentage ratio.

Working Partner

Usually a person who has limited cash funds available and is looking at maximising their returns for the same amount of work.

Silent Partners

Usually a person who has previously owned management rights and is looking for a return on their capital or even an existing management rights operator who is looking at diversifying their asset base.

For more information or assistance with partnership arrangements please contact us.

Case Study

Mr & Mrs Jones have been working as mangers in the industry for a number of years however now wish to get directly involved in the industry. They only have $300,000 cash fund available.

Option 1

They could buy a small complex and own their own business:

Managers Unit:
$400,000
Management Rights:
$500,000      (say NP$110,000)
Purchase Costs:
$50,000
Total Costs:
$950,000
Less Cash:
$300,000
Borrowing:
$650,000

Return on Investment:

Net Profit:
$110,000
Less loan interest:
$52,000         (say 8%)
Pre Taxable income:
$58,000

Gross return on cash invested 19.33%.

Option 2

They could find a silent partner to assist with the purchase of a larger complex.

Managers Unit:
$500,000
Management Rights:
$1,600,000      (say NP$300,000)
Purchase Costs/capital:
$140,000
Total Costs:
$2,240,000
Maximum Loans:
$1,520,000
Equity Required:
$720,000

Assumptions

Equity Required:

  • $300,000 - Mr & Mrs Jones (equity 41.66%)
  • $420,000 - Silent Partner (equity 58.34%)

Bank Loans:

  • Loans can be split individually to the partners or alternatively partnership can undertake borrowings.
  • In this exercise partnership will borrow the funds.

Working Partners Salary:

  • It is agreed between the partners that working partners will be paid a salary of $60,000 pa

Return on Investment:

Net profit:
$300,000
Less loan interest:
$122,000      (say 8%)
Less Partner Salary:
$60,000
Income for distribution:
$118,000

Working Partner:

Salary received:
$60,000
Share of income (41.66%):
$49,158
Total Income:
$109,158
Return on capital (300k)
36.38%

The cash return and investment return under the partnership is far greater than going it alone in a small complex. Refer option 1.

Silent Partner:

Share of income (58.34%)
$68,842
Return on capital ($420k)
16.39%

Return on capital represents a sound premium to general bank investment interest rates.

" Barry's knowledge of the banking industry and experience with Management Rights impressed us, with the result being a very smooth exercise in obtaining finance that was also very competitive."

Brian & Michelle Walker - Riviere on Golden Beach