Profit Sharing

[blue.gorilla]

Hi all,

I am in the process of opening a Mexican taqueria in Europe. We have a Mexican chef who will be running the kitchen, and he prefers to be paid a lower salary but have a share of the profits. We don't want to offend him with a low salary as he is integral to legitimizing our project in the eyes of our market (most Mexican restaurants here are terrible and do not have actual Mexicans cooking the food).

So my question is: what percentage of profits is appropriate to offer? As a new restaurant with investors and the bank to repay we can't be giving a large percentage, but at the same time, if we don't offer a significant percentage, the extra pay will be miniscule and not enough to keep the chef happy. What's your advice?

[Blether]

Did you do this already ?

Work out what salary you'd pay if he was on salary alone, and how much annual profit you'd forecast for the restaurant if he generally satisfies your expectations as chef.

Calculate the difference between that salary and the lower salary he's happy to accept, and what percentage of the forecast profits that is.

He's willing to accept down-side risk as well as upside risk, so you want him to get more in total with the salary & share package, than with salary only. So offer a percentage that leaves him 15-25% better off than the salary-only deal.

Edited October 8, 2010 by Blether (log)

[ChefCrash]

I hope your chef is better at running a kitchen than he is making business deals. He's either naive or is really looking out for you:)

Go ahead, offer him 50%. He won't make a dime for months, and if you're shrewd, perhaps years.

Based on information you gave, (kitchen, banks, partners/investors), this will not be a Taco truck or canteen. You won't have a problem writing off expenses for a few years i.e. no profit.

Until you can see what this chef can do for your business, pay him a fixed salary based on his previous earnings.

If I were him and confident: I'd ask for a fraction of the receipts, not the profits. Say 2% (make it sound tiny)

Now if I were you, don't go for it. He may end up earning more than you.

Good luck.

[blue.gorilla]

Yes originally we were trying to calculate it as a percentage of receipts, but that kind of defeats the purpose of the scheme. We don't really want to "rip him off" per se, but he wants a part of the action and we want him to have an incentive to reduce costs and waste to the bare minimum to increase profit and, therefore, his pay. Sounds good in theory, but as you pointed out, there won't be much profit to go around.

The way we are structuring the company is the three owners (myself included) will earn a small salary and take no profits until the debtors are repaid (meaning all profits go toward repayment), at which point we will start getting a hefty portion of the profits while the rest is divided proportionally between the investors.

This poses the issue that, as you pointed out, the chef will not see any actual portion of real "profits" until everyone is repaid, which we are projecting will happen in about two years time. So in order to do this and have him see a benefit, we will have to take a portion of the payback money and funnel it to the chef, which in turn will elongate the payback period (and puts off my payday).

It's all very confusing and I can't see the correct solution....