The business aspect of jewelry making

Jewelry Discussion
1

I am ready to incorporate. I have two friends who have decided to
help out with the business aspect such as track inventory, contact
potential buyers, and organize a trunk show. One friend has gotten my
designs into a store; the store owner is taking a 50% markup from
wholesale, the other has contacted a location where I can rent a
space to sell my designs (which I’ve decided to do). My question is,
these friends want compensation for their work, I have told them that
I can’t afford to pay salaries, and they say they would rather have a
% of the corporation, i.e. take a percentage of the profits. What is
the customary way of deciding how much they get, and do they get a
percentage of the corporation or do they just receive a percentage of
the profit without owning a part of the business. Also, I have yet to
even recuperate the money I’ve spent so far. Any advice here is
greatly appreciated.

Thanks.

2 
these friends want compensation for their work, I have told them
that I can't afford to pay salaries, and they say they would rather
have a % of the corporation, i.e. take a percentage of the profits.
What is the customary way of deciding how much they get, and do
they get a

Best of luck.

There is a saying, that if you go into business with a friend, you
will either lose the business, or lose the friend. Sometimes both.

INC. magazine had an article about partnerships that stressed THE
most important part of forming a partnership is to plan for the
dissolution of it.

If later, someone wants out, what is the procedure? Can they sell
their ownership to anyone? or just the partners? Which partner?

Two friends started a business together. One friend was soon calling
it “that damn business.”

They recently went out of business, the one quoted above taking a
financial hit to get out. They are still freinds, largely because she
was willing to take the hit to get out and still be friends.

Anyway, SCORE can help you, make an appointment. Also there is a
Women’s Small Business Development Center.

Check the SBA website for links to all and lots of good reading.

Plan for success, but also know what you would do in a failure. Think
of it as a pre-nup.

If I were in your shoes, I would find a way to pay my friends while
retaining full ownership of my company. Even if I had to borrow money
to do it.

Recent article in INC., maybe the current issue about Switch, the
drink. The inventor and his friend went into business together, and
later the friend forces the inventor out of the business! Then later
the board forces the friend out!

Make sure you know what you’re giving up before you give away parts
of your business.

Elaine
(Who is sorry to be such a downer)

Elaine Luther
Metalsmith, Certified PMC Instructor
http://www.CreativeTextureTools.com ™
Hard to Find Tools for Metal Clay

3

Rosa,

It’s wonderful that you have friends who are so supportive of your
venture. I would, however, like to offer a couple of words of
caution. If these are friendships that you value, make sure that you
clarify everything from the beginning legally and personally, or you
run a real risk of losing the friendships. By that I mean that you
should each sit down and brainstorm the “what if” scenarios… with
$$ included… to determine how to structure their involvement (or
lack thereof) to be as businesslike as possible while divorcing the
emotional/personal from it. For example, talk about “What if the
designs take off and I start grossing $1million/year… if you’ve
negotiated blah/blah with me as a percentage, will you resent the
disparity in our relative incomes?” If so, then let the alarm bells
start ringing and consider whether a long-term business relationship
is really what you both want.

There are several models that can work if everyone’s on the same
page and has the same expectations:

  • Joint ownership: They own part of the corporation and are legally
    bound to it. They have the same legal obligations that you do and
    are “stockholders” as well. That means that they get to help make all
    the business decisions and, if their joint ownership percentage ever
    exceeds yours, they can even take control of the business.

  • Commission/Contract: They get a set percentage of “commission”
    based on the impact of their involvement in the business. This can be
    measured in terms of sales, if they are selling on your behalf, or
    can be measured in terms of other activities (marketing, accounting,
    etc) and a set “value per hour” that you both agree on. For example,
    if you would have to pay an accountant $150/hour to do your books,
    you can agree to pay your friends on commission based on the number
    of hours they perform that task. They aren’t your employees that way
    (but check IRS rules on number of hours per year before you have to
    pay benefits and include them in any retirement plans), and they
    don’t have any say in business decisions. They are purely contract
    employees.

  • Limited-scope commission/contract: You can agree do a certain
    percentage of the profits (NOT the gross receipts) of sales over a
    set period of time to pay them back for their work so far, and then
    negotiate an ongoing commission or contract for any future work. For
    example, you might say that they get 10% of profits for the first 3
    years of the business, then move to 7% for the next 5 years if they
    continue doing exactly the same role. Be careful, though, that as
    the business grows their definition of the role should grow with it!
    If they’re spending 5 hours/week doing something now, be clear that
    your expectation will be that as the $$ grows the number of hours
    should also.

I would also suggest talking to Cynthia Edelstein for a
consultation… could be WELL worth the investment in helping make
good choices. www.jewelersresource.com

Hope this helps!
Karen Goeller
@Karen_Goeller

4

You have a situation filled with problems. The first is that if
you’re not making enough to pay “employees” (or friends working for
you), then you should be doing most of this kind of work yourself.
The second is that you have two people trying to own a piece of the
business. Even if you give them a small piece, it means they own you
in some respects. You can’t truly make independent decisions
anymore. Every time you want to spend money on new tools, or
supplies, or try something new they can put the kibosh on the whole
idea because it’s impacting their percentage.

But you run into a somewhat bigger problem as well. Let’s say that
they each own 10% of your business and that they want compensation
as a “percentage of the profit” (10% each). But now let’s say you’re
doing $100,000 per year and after you’re done paying for materials,
advertising, tools, etc. there’s $25,000 left. But you need a salary
(which is part of a normal business expense–your salary, especially
in a corporation is not profit). So you take the $25,000 as your
salary. Then there’s no profit. The next year you double your sales,
but you’ve worked twice as hard so you take $50,000. There’s no
profit. Frankly, other than investing in new materials for
merchandise, in a small business, the owner will generally take all
of the “profit” as salary (because we all have to live on
something–plus we deserve it). If you have reinvested some of the
“profit” into new merchandise, you may show a profit but then you
have no excess money to pay them a percentage of it anyway because
you’ve reinvested it all. So you, in all honesty, would have to tell
your friends that you’d be happy to give them a percentage of the
business, but it is unlikely, unless you grow into a multi million
dollar a year business quickly, that they will ever be paid any
money from the “profit”. The only money they might make from this
would be if you agree to buy them out at some point for some set
amount of money. Of course then you have to be prepared to have that
amount of money to pay them with. As another poster said, you need to
have a prenup on this one, if you do decide to go through with it,
with an INCREDIBLY CLEAR buyout plan in place (trust me on this one,
I’ve been there). But honestly, I have to go back to my first
statement. You’re not doing enough business yet to warrant taking in
one partner, no matter two.

Daniel R. Spirer, G.G.
Daniel R. Spirer Jewelers, LLC
1780 Massachusetts Ave.
Cambridge, MA 02140
@Daniel_R_Spirer

5 
There is a saying, that if you go into business with a friend, you
will either lose the business, or lose the friend. Sometimes both.
INC. magazine had an article about partnerships that stressed THE
most important part of forming a partnership is to plan for the
dissolution of it.

I have a set of friends that started a business together,
incorporated and everything, but they didn’t plan an exit strategy.
They invested $$$ in the start up and there were a lot of bad
feelings by the end of the “break up”. Who owes who $$$, product,
business name, etc… It was a mess. These two good friends couldn’t
make a go at it together and now they will not speak to each other.
They will not even attend the same party. It’s very sad. I don’t
think it was worth the friendship.

Be very careful. I personally wouldn’t go into business with a
friend. My friends are too important to me. I would pay your friends
for their time and efforts any way you can. Work out a trade, a
payment plan, make them dinner once a week for the rest of their
lives if that works. Figure out something that works for everyone.

Good luck,
-Amery

6

Rosa:

My first piece of advice to you is not to go into business with your
friends! I can guarantee you the outcome will not be good. I’ve lost
two friends by going into business with them and I will not do it
again. Think long and hard before letting your friends into your
business. Remember, this is a business and there is no room for
friendships. Hate to sound negative, but I just want you to protect
your business and your friendships.

If I had to choose between my friends and my business I’d choose my
friends. They really are more precious than gold.

Good luck!

Tammy Kirks
Red Bee Designs

7

I work with my best friend. He is a master woodworker / cabinet
maker.A lot of my small sculpture pieces are sold in shadow box type
mountings which he makes for me. He also lathe turns the wood that I
incorporate into some pieces as well as making the bases for others.
What we have found that works for us is he figures his costs and
labor and that is added into my finished sale price. When the piece
sells we both get paid for our work. This has worked for us for
years. If anything working together and sharing ideas has made for a
stronger friendship.

Rick ( Who cannot believe we got 6 inches of snow yesterday. Sadly
the peach trees were in full bloom too.)

Beads, Bones and Stones

8

why are you incorporating? That is diving into the deep end…
albeit I’m in Canada the rules may be different, so nevermind.

Think about something less entangled then incorporating together,
try they get percentage of the sales they do, so if they back out and
stop making sales there is no confusion no mess, no explaining why
some tools are nessicary or worse if they are really keen why some
great contraption advertised in god knows what is a waste of time.
Although that percentage becomes a set expense and will exist proffit
over all or not…

Get a blank business plan, write it out, try it for the grand
pipedream of everything going perfectly and then write one for an
intermediate stage between now and then, and alway alway always leave
everyone a backdoor.

Cheers
Norah Kerr
www.besmithian.com

9

There are those here, no doubt who could go deeper than I in
incorporting - see an accountant, really. However - there are only
two ways to see it in the end. If it is your business - that is, you
are a sole proprietor, and they work for you, then you HAVE to pay
them. I use caps because it’s not optional, it’s only right, plus
it’s the law - the EDD will come down on you will steel toed boots
if anybody files a complaint - take out a loan, if necessary- you
must pay your employees. If you incorporate, then they become
corporate partners of a negotiated percentage, and they don’t get
paid at all. Just like you, they can only tap into that percentage of
the profits if and when there are profits to tap into. That is the
simple picture. You are looking in the wrong place though - you need
to talk to your accountant. If you don’t have one, go fine one
because you’re going to need them.