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.

[WV]

Option 3 no doubt. Unfortunately I don't see a good ending with the former partner. Hopefully not, but you may be better off closing the whole deal and cutting your loses. By the time you most likely have to go to court and the time involved.

[1ChiefsDan]

I would have an independent audit conducted and come to a settlement based on that. So, I guess a version of 3.

[Reerun_KC]

Option 3

[Dayze]

That blows dude. Hope it works out in your favor

[Saul Good]

Originally Posted by 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.

What are you actually buying?

[NewChief]

Originally Posted by Saul Good

What are you actually buying?

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.

[Saul Good]

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.

I will value the brand identity of a sixth month old unprofitable business at $0.25 (give or take $0.25). Figure out what the hard assets are worth and offer half (or less if you want to stick it to them. It's not like they can likely take these assets with them or sell them to someone else for much.)

[Hoover]

Originally Posted by Saul Good

I will value the brand identity of an unprofitable business at $0.25 (give or take $0.25). Figure out what the hard assets are worth and offer half (or less if you want to stick it to them. It's not like they can likely take these assets with them or sell them to someone else for much.)

Good advice.

[Iowanian]

Originally Posted by Saul Good

I will value the brand identity of a sixth month old unprofitable business at $0.25 (give or take $0.25). Figure out what the hard assets are worth and offer half (or less if you want to stick it to them. It's not like they can likely take these assets with them or sell them to someone else for much.)

I agree with this and with Hoover's assessment.

Your wife is the creative talent and the brains of the operation, the other partner is a clerk.
At 6 months, if the store front isn't opened and you don't have brand identity the business isn't worth anything.

That can be very frustrating to hear as a person whom has sunken significant finance, time, heart and soul into a business venture. I was approached about my company a couple of times around my 3rd year and when it came to pricing, the comment was "what is this business worth if you die tomorrow". Were my clients and contracts loyal to ME or to my brand name?

A rough question, but if your wife is the brains and the creative talent, would the business have any wholesale value if something terrible happened to her? Would there be anything more to sell than the office supplies and start up materials?

If so....the value of the business to me is the cost of what those items would bring.


If they're peckerheads about it, shut the door, fire up a new LLC and switch over what you have to that Brand.

[J Diddy]

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.

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.

[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.

[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.

[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. :-)