Buying out a Business Partner?

[NewChief]

Okay,

My wife and her friend went into business together about 6 months ago. My wife supplied the design/buying/art, and the partner was supposed to handle the store front and books.

The partnership has soured (I don't even want to go into it). The partner and her husband are moving to a different town and wanting us to buy them out of the business. They claim that they have $11,000 in it (which we don't believe). We also suspect that there has been quite a bit of freewheeling with the books and her "paying" herself when she claims she hasn't drawn a dime, saying she's only put more and more of her own money into the business (while not documenting the shit in any meaningful way).

She says she wants their money back, and they'll be out. Here's the deal: The business hasn't made a profit yet. We're only 6 month in.

Some options:
1) Pay them and be done, but saddle ourselves with more debt.
2) Try to value the business, looking at assets and such, then decide on a price to pay them.
3) Have a CPA (or someone) go over the books to try to give an accurate picture of what's gone wrong in the first six months. Then tell them to get bent because there was unethical shit occurring.

Other ideas? I'm stressed as hell about this right now, and we plan on hiring a CPA once the partner is gone. The business model is solid, and sales are good. We just suspect that we're not doing well because of poor book keeping and money "leakages." We do feel like the business is a liability, and few investors in a business would expect to be able to get their full money back in 6 months of doing business.

[Saul Good]

Originally Posted by J Diddy

Are you going to retain location? What's the value of the assets? How attached to the store name?

Just my simple opinion but it seems to me regardless of who has put in what, unless a stipulation of ownership based on percentage invested was involved, a liquidation should be 50-50. I would think if you're trying to retain location, agreeing to get their name off the lease would be sufficient to buy out the name and pay 50% on all physical assets.

If there's a lease with the partner's name on it, that is a liability to her. Her share of the balance of the lease should be subtracted from her share of the hard assets.

[NewChief]

Originally Posted by Saul Good

If there's a lease with the partner's name on it, that is a liability to her. Her share of the balance of the lease should be subtracted from her share of the hard assets.

Good point. Thanks.

[Dave Lane]

Here's the deal. If you think the business is priced to high simply say, "we accept your offer, and a check would be fine."

Once they see they might have to pay you they will happily tell you that the business isn't worth it and you can tell them you are just trying to be fair since it was what they thought was a fair price.

[J Diddy]

Originally Posted by Saul Good

If there's a lease with the partner's name on it, that is a liability to her. Her share of the balance of the lease should be subtracted from her share of the hard assets.

I agree. My suggestion was a painless way to get ownership of the business name without a payoff. All they would have to do is fulfill the lease obligations, which they would do anyway. If they are planning on retaining location and name a simple gesture such as that may open the negotiating table up.

[J Diddy]

Originally Posted by NewChief

Good point. Thanks.

Great point. Glad I thought of it.

[Bwana]

Option 3

If she has been cooking the books tell they to walk away, or face legal charges.

[Amnorix]

Originally Posted by NewChief

That's a good point, and we've been told to just go that route (dissolve the business, then reform it as something else under our sole ownership). The main thing we're buying at this point is the brand/identity and, I suppose, the assets in the storefront.

Originally Posted by Bwana

Option 3

If she has been cooking the books tell they to walk away, or face legal charges.

What's the legal charge, really? Are you going to spend money on lawyers? Unless the dollars are truly serious, this is a fairly empty threat.

[Brock]

They're trying to steal money from you. Don't pay them a goddamn dime.

[Bwana]

Originally Posted by Amnorix

What's the legal charge, really? Are you going to spend money on lawyers? Unless the dollars are truly serious, this is a fairly empty threat.

I would assume that if she has been cooking the books a stealing money that that would be a crime.

[Amnorix]

First, hard as it is, divorce the emotions from the process.

1. The business does or doesn't have value TO YOU based on its location, the lease, the name, the goodwill of the customers, etc. What THEY put into the business is COMPLETELY IRRELEVANT. If they whine about it, tell them it's just like buying a house -- when you go to sell, nobody cares what the prior owner paid for it.

2. DON'T waste money on a CPA to try to figure out what happened. Whatever has happened has happened. Whatever they did or didn't do in terms of swiping anything is done. If she kept crappy books and no records/receipts, etc., then the CPA is going to be handed a mess, spend a zillion hours figuring out nothing all for what purpose? You won't get a value of the business out of it, and probably won't even know what happened after all that aggravation.

3. One of the few good posts on this thread asked "what are you buying?". That is what you need to look at. Is there a name of the company that is worth anything? A website? A lease? What debts/obligations does the business have? Whatever they are YOU will have sole responsibility for them after this partner gets bought out. Look at what you're getting and be coldly dispassionate about it. What would you pay for it?Think of everything the business has - office space, telephone number, location, signage, customer goodwill, etc. What is that worth to you NOW? Not based on some fantasy of what you hope the business will be in three years. Finally, what would you pay to get this fool partner out of your life hassle-free, if you want to continue the business?

4. Flip side -- what is it worth to the partner to get out of this, if anything? Is she on the hook for half of the rent payments on leased space for five years? Is there a bank loan (unlikely). If she is getting off the hook on anything, that reduces the amount you pay. She wants to move on, and this may hold her back.

5. Consider if/how this business can succeed. There was a plan that originally needed a partner. She failed, but can your wife succeed on her own? Can she do everything she was supposed to do AND everything the partner was supposed to do? Should she cut her losses because it's too much weight for her to carry alone? Can someone else take part of the load as a second-in-command type? What's the plan? You can't figure out what it might be worth if you have no plan going forward.

6. Ultimately, the business is owned 50/50. J Diddy and Saul Good have it about right in terms of just valuing the hard assets. Unless she has leverage on you because she knows you want to continue the business, then all both sides are entitled to is basically liquidation value.

7. If the business was formed as an actual organization (whether corp or LLC), then you need something buying back the ownership interests in the entity. You should also exchange full releases. If it was an informal partnership, then you'll need something else -- an odd asset purchase agreement, dissolution-type thing, dissolving the partnership and putting all assets in your wife's name.

8. Keep in mind tax obligations in connection with all this. Consult with your accountant as necessary.


9. Ultimately, the best bet may be to say something like "hey, look, the business has made no money, has very little goodwill, and very few assets worth anything in a liquidation. I can't spend any serious money on this to keep it going, because I certainly won't get it back and now I need to hire someone to take the job that you were supposed to fill. I'll pay you $X (some number that is near half book value for the assets) for everything, we'll exchange mutual releases and move on with our lives. Otherwise, we can just auction it all off and split the proceeds."

That kind of line may bring reality into sharp focus for them.

I'm glad to answer more questions, including about legal documentation, though I'm traveling this week so my responses will be very spotty.

[Amnorix]

Originally Posted by Bwana

I would assume that if she has been cooking the books a stealing money that that would be a crime.

Good luck (1) getting the cops interested, and (2) proving it since I imagine the books were poorly maintained, if maintained at all. Maybe in small town America, I dunno, but around here, that won't go anywhere.

A business is worth roughly twice its annual profit. If the profit is $30k, by all means give them $15k. Otherwise, they made a bad investment and they should learn from it. They're the ones moving. If they want to stay and work the business into profitability then they should do that. Otherwise they should spend $300 on a community college business course.

[Amnorix]

Originally Posted by Brock

They're trying to steal money from you. Don't pay them a goddamn dime.

This is a business decision. While I understand the principles of your reaction, a "goddamn dime" might be well spent. Alot of unknown factors here.

[ghak99]

These situations suck!

Input costs are meaningless and the current value of the business is the only thing that matters. Total the assets and offer market value for their half if they're willing to release the brand/logo/identity in exchange for you taking over the lease. If they decline, make it clear the doors are shutting and they can either buy you out or everything will be liquidated.

If the business model is sound, take what you've learned and go at it alone with a new and improved brand/logo/identity.

I actually had them counter with the offer I made them. 6 months later I had a much better logo/identity up and running and they folded up shop knowing they ****ed up. I didn't really know it at the time, but getting the chance to start fresh with my own image of the brand was what I should have pushed for in the beginning.

[Amnorix]

Originally Posted by DaneMcCloud

Hiring a CPA to "go over the books" is meaningless.

What you need is a valuation of the business. It doesn't matter if they put $100k into the business if it's worth $5k.

Good luck!

^ This.

Originally Posted by NewChief

That's a good point, and we've been told to just go that route (dissolve the business, then reform it as something else under our sole ownership). The main thing we're buying at this point is the brand/identity and, I suppose, the assets in the storefront.

It occurs to me that if this partner is responsible for REALLY piss poor record keeping, you may have tax headaches. You may want to consult with a CPA about whether a fresh start might put you in a better position tax-wise. As I understand it,** generally a stock redemption is NOT a taxable write off, while re-launching the business, if it involves repurchasing hard assets (furniture etc.) is deductible.

If you do have tax headaches, then they may be solely yours if you repurchase the stock, while if you just cut bait and let the company die, then they remain shared 50/50.

**I am NOT a tax professional. Usual "what the **** are you thinking getting legal/tax/important advice on a goddamn football message board" rules apply. :-)