Buying out a Business Partner?
 

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.

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.

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

Option 3

That blows dude. Hope it works out in your favor

What are you actually buying?

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!

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.

Agreed. As you're describing it, "buying them out" sounds like paying them to go away. That isn't worth anything.

Option 4: Tell them to F off, end the lease and open under a new name.

Seriously, she's a book keeper and store manager.

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.)

Good advice.

Yep. There's a word for what she is doing. It's called "quitting".

how much does she value the friendship? because honestly, she's owed almost nothing as far as I'm concerned--if you want to be on the up and up and maintain what's still there, get the business valued and offer her half of the value. otherwise, hoover's solution is what I would do.

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.

Good point. Thanks.

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.

LMAO

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.

Great point. Glad I thought of it.

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.

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

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

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.

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.

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.

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.

^ This.




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. :-)

or a Math course, apparently.

Read the book Sammy the Bull put out. It's full of hostile takeover tactics.

They have to account for the money the lady is skimming.

Heh. I realize my math was hasty (and backwards) but the point was that the business is not profitable. Zero x 2 is still zero.

Seperate yourself, have an independant consultant look over the financials, separte yourself, get advice from a proffesional in the field, seperate yourself, go over results from the financials/professional.

It's business, shit happens.......get professional advice and make a decision from there.

Make 3 investments

A match
3 gallons of gas
An insurance policy

If it were me I'd offer what you think you can make work. If that's $14, offer $14. If they don't want it, liquidate. You can always start your own business. That's basically what you're doing anyway. Unless it is a legal entity and the name is filed with the state, you can even use the name.

Operate it like a business, don't get married to it.

In California, you can't you start a business without a DBA or LLC. I have city permit filed as well.

Is that not necessary in other states?

Not necessarily. My person farm doesn't. Lots of schedule C type enterprises don't. Only if it is a separate entity.

What's a "person farm"? Is that like pizza on a plant? ;)

Quitting Advantage Plan. All the benefits of quitting, plus no monetary loss. Partner seems to want a pretty nice bailout.

Wait until after the tax year ends (one month away).

Liquidate, and buy back the items that you want at a reduced rate.

You are in the position of power. There is no such thing as "nice" in business, and chances are the relationship is already ruined anyway.

This is about all I've got in addition to what others have said. So, this!

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.

In short, I'd tell the partner to pump aids gas up her hatchet wound and piss on a brush fire.

Assets-Liability= What the company is worth if you don't want to liquidate


They are absolute morons if they think they will get the money back that they have put in this early, and since there are two women involved this is going to have several meltdown moments.

I have heard stories that early partnership problems like this have a common theme: The seller thinks they are entitled to getting paid for their time, just like an employee.

Good luck.

If you offer them some money, also offer them the opportunity to purchase the business from you for the same amount.

Are you personally guaranteeing the lease?

LMAO
"Hatchet Wound"

and don't go into business with friends...

What kind of business (LLP, LLC, etc?). Is there an operating agreement with buyout provisions? Before any buyout, I would definitely value the business, assets, etc. She shouldn't be able to get any more out of it than what she can prove she put into it. Sounds like you need a good attorney as well. These types of transactions are part of the types of things that my attorney handles (checking for loopholes, legalities, drawing up contracts and agreements, etc.).

:LOL:

This.


Especially if there are two females involved.

If you suspect "freewheeling with the books" then you would be better off terminating this business and starting fresh. Business entities need to be separate from personal holdings- this is what protects your stuff in the case of audit or litigation. I wouldn't want to be the only one holding the bag some years from now trying to explain that the freewheeling that occurred with the business I now solely own was not my fault.

Option 3


Never go into a partnership with anyone in business... Messy Messy Messy

Well, I wouldn't go that far . . .

Dane is wise. Having been through this myself, he's absolutely correct. Don't forget, you're not only buying their share of the business. You're also buying their share of the debt and liability/risk, it is absolutely crazy to think you can get $ for $ that soon after starting a business.

I agree with a lot that has been said already. It's almost laughable that they expect money at this point in the business juncture.

friends + money = enemies

... and it's still better than family.

Your friend isn't very bright. The value of the business is the value of the business. If she was taking money and making it look like it's losing money you are going to get it back on the valuation. You can go down the other road and try and prove embezzlement but that may turn out being far more costly.

Been doing it since 96

really, a combination of all of the above. Here is what I would do.
1. Have the partner produce receipts for everything they are claiming they put into the business. This is a must. If they are unable to do so, then it doesn't count.
2. Decide which costs they contend they put in are actually requirments for the business. In other words, gas, lunch, lap top for home, etc. don't count.
3. Have an accountant go over the receipts as well as the business records to show a true split of assets and worth. You will probably need to get an outside accountant that isn't associated with either of you so there is no bias.
4. If it seems that there is cash flow to operate the business without you having to sadle yourselves with debt that cant be covered by the business, then you have a tough decision to make. You may have to cut your losses if not. If there is, then you can buy them out and move forward.
5. Have an attorney draft a buy out agreement that includes all the pertinent stuff like no compete, etc. and move forward. Otherwise, have them draft a dissolution agreement.

Change out the locks. Hire a CPA asap. then let them come with their BS. make your offer, if they don't take, let them make the next move. courts usually assign arbitration in these matters.

#3

There are several informal methods for valuing a company. The ones I use in our own accounting are:

1. Average of the last five years of profit (Average profit per year) There's some adjustment you make, and I don't remember why, but I divide that number by 0.15 to get a value estimate. You also have to add in any salary the owner takes.
2. Average of the last five years of revenue.
3. Most recent year of revenues, plus any salary the owner takes.
4. Dividend paying ability, which is more or less the amount of total salary and profit the owner takes (in the most recent year)

I use all four and then average them since they can vary widely depending on a number of factors. These figures do not include things like the value of inventory, cash on hand, and the liability of a lease.

You have to get a 3rd party involved and a CPA would be a good start.

The two times profit rule is a decent starting point, but it is FAR from a hard and fast rule. Even then, it is important to include the value of hard assets, subtract out debt, etc.

It may not be applicable at all in circumstances where the owner is so tied to the business that the profits will be disproportionately impacted by the transfer of ownership. For example, some chick can have an adult web site where she sells memberships to watch her do porn shows. I can buy her site for 2x profit, but I'm not going to be able to replicate those profits on my own because she was the product, and the business was little more than a vehicle to deliver the product to the customer.

I doubt it based on what I've heard so far. This is a "take it or leave it" offer waiting to happen.

I would try option 3 first, then maybe option 2 and 1, if necessary.

Edit: Forget what I said. There are a lot more knowledgeable people on CP than I realized.

these are great points and I use similar methods, but this situation is different because the business hasn't matured -- he's in the investment stage and now his partner wants to "uninvest" which, unless there were a previous agreement regard "money back" etc, there is no such thing.

Really, all this comes down to is that the OP has a conscience and would like to at least give some of that investment back. Nobel, I guess, if that's the proper way to handle it. But there is no refunds in starting a business. Not that I'm aware of, unless there was previous arrangements.

NOt sure why you would want to hire a CPA to charge you for something you are probably already aware of.....there is little value in the business.

Hiring CPA's or Attorney's in something like this are just added expenses that aren't needed. It's like watching a Chapter 7 proceeding as Attorney's and CPA's pay themselves from the proceeds of the estate and whittle away what little assets that are left only to tell everyone there are no assets available.

** Apologies to Amonorix and any other Attorney's along with an CPA's on this board. Guess I have had to sit on too many Unsecured Creditor's Committee's lately.

The reason he can use a CPA now is to thoroughly document financial of the company to date using a qualified 3rd party source. No retainer necessary, just get this snapshot now.

and no need for a lawyer unless you want. I have settled this during arbitration on my own. really, it's all about a number, getting to that number can take several steps though. but don't feel like you have to settle this pronto. I'm sure they do, let them spin wheels, they seem like a dishonest type, so just let them do the work and eventually, they will find a number you will be okay with.

BTW, how much do they want?

BTW, I hope you have a solid inventory of the store. Take photos of everything if needed.


When they find out that you aren't going to give them 11K, they will help themselves to anything and everything in the store.

How would the Sons of Anarchy settle this one?

If you need the name of a lawyer in NW AR - let me know. I think you start by asking for receipts and proof of the money invested and where it has all gone.

The receipts don't mean anything, nor does the money invested. The business is worth what it's worth. The investment is a sunk cost.

As far as lawyering up goes, it's likely not worth it if the partner is asking for $11k. Even if her share is only worth half that, you're going to rack up enough in lawyer fees to offset most, if not all, of the savings.

You're likely correct, but I'd still make them prove it...