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 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.

BTW, how much do they want?

[notorious]

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.

[Mile High Mania]

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.

[Saul Good]

Originally Posted by Mile High Mania

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.

[Mile High Mania]

Originally Posted by Saul Good

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...

[NewChief]

I'm heading to a meeting in a few minutes to discuss with the partner. As of now, she's being very amicable and easy going. My current plan of action for this meeting.

1) Start removing her access/control of any accounts associated with the store.
2) Tell her to get everything ready to turn over to our CPA for tax purposes.
3) Tell her that we'll dissolve the corporation and discuss possible buyout after taxes have been filed and we have an accurate picture of the business's worth and liabilities at year's end.

They're trying to move, her husband is starting up a company (with his brother in law... man oh man...), and they seem to be pretty agreeable because they have other shit to deal with as well. We'll see if they're that agreeable when we start making lowball offers based on the worth of the store. In addition, this is an extremely busy time of year for the store, so it's all we can do to stay afloat and deal with the demands of the store without trying to restructure and hire someone for the holidays. I know this also sucks, because the net worth of the store may grow in the next month or so due to the revenue for the holidays, thus giving her more value in the buyout. That's okay, though.

Many of the recent problems built up over Thanksgiving Break while they were out of town, and we were communicating through emails (resulting in a lot of miscommunication between the wives) while the wife and I were busting our asses at the store.

The business is an LLC, btw. We will probably try to dissolve the LLC and refile as an S-corp.

Thanks so much for all the advice. It was tremendously helpful and comforting. I sent a lot of it to my wife. She sent it to her stepfather, who was extremely impressed with the quality of advice from some internet message board (he's a healthcare lobbyist and businessman who we haven't let get involved because he's so ruthless in this shit and we wanted to try to salvage the friendship).

This place rocks.

[Ace Gunner]

Originally Posted by NewChief

I'm heading to a meeting in a few minutes to discuss with the partner. As of now, she's being very amicable and easy going. My current plan of action for this meeting.

1) Start removing her access/control of any accounts associated with the store.
2) Tell her to get everything ready to turn over to our CPA for tax purposes.
3) Tell her that we'll dissolve the corporation and discuss possible buyout after taxes have been filed and we have an accurate picture of the business's worth and liabilities at year's end.

They're trying to move, her husband is starting up a company (with his brother in law... man oh man...), and they seem to be pretty agreeable because they have other shit to deal with as well. We'll see if they're that agreeable when we start making lowball offers based on the worth of the store. In addition, this is an extremely busy time of year for the store, so it's all we can do to stay afloat and deal with the demands of the store without trying to restructure and hire someone for the holidays. I know this also sucks, because the net worth of the store may grow in the next month or so due to the revenue for the holidays, thus giving her more value in the buyout. That's okay, though.

Many of the recent problems built up over Thanksgiving Break while they were out of town, and we were communicating through emails (resulting in a lot of miscommunication between the wives) while the wife and I were busting our asses at the store.

The business is an LLC, btw. We will probably try to dissolve the LLC and refile as an S-corp.

Thanks so much for all the advice. It was tremendously helpful and comforting. I sent a lot of it to my wife. She sent it to her stepfather, who was extremely impressed with the quality of advice from some internet message board (he's a healthcare lobbyist and businessman who we haven't let get involved because he's so ruthless in this shit and we wanted to try to salvage the friendship).

This place rocks.

Ah, different rules with LLC. Good luck and don't be afraid to drag your feet before agreeing to anything unless it's something you want to pounce on

[Jenson71]

Sounds like a good development, all things considered.

You can still be an LLC and also be an S-corp. S-corp isn't its own entity, it's just the subsection of the IRC that you do your taxes under.

[Saul Good]

Originally Posted by Lou_Zare

Ah, different rules with LLC. Good luck and don't be afraid to drag your feet before agreeing to anything unless it's something you want to pounce on

Yep. Time is on your side here.

[mikeyis4dcats.]

I see no harm in accounting for sales from this point going forward as outside of the settlement agreement if they are basically walking away from the enterprise and not contributing further at this point.

[Saul Good]

Originally Posted by mikeyis4dcats.

I see no harm in accounting for sales from this point going forward as outside of the settlement agreement if they are basically walking away from the enterprise and not contributing further at this point.

That's going to be a tough sell. If the business is poised to have a big holiday season when the separation occurs, the business had value, albeit unrealized, in the period immediately beforehand.

[mikeyis4dcats.]

Originally Posted by Saul Good

That's going to be a tough sell. If the business is poised to have a big holiday season when the separation occurs, the business had value, albeit unrealized, in the period immediately beforehand.

you don't have to totally cut them out, but if they are no longer contributing to the enterprise, they shouldn't reap an equal share of the profits. THEY asked to get out, not the other way around. They could have stuck it out until after the holidays.

[Amnorix]

Originally Posted by DaneMcCloud

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?

Well, it's certainly not JUST those two. Certainly you could form a C Corp or S Corp or various partnerships.

I don't know the rules in California, but the normal rule is that you can have a business whether or not you formally file any kind of paperwork with anyone. The paperwork relates mostly to tax obligations and legal liability issues, as well as ownership of assets being vested in a third party rather than individuals, etc. etc.

[Amnorix]

Originally Posted by Mosbonian

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.

I'm not a bankruptcy attorney nor a CPA, but I definitely understand where you're coming from. I do alot of bank work (though not DIP financings) so I see the end result sometimes.

[Amnorix]

Originally Posted by Literature

Sounds like a good development, all things considered.

You can still be an LLC and also be an S-corp. S-corp isn't its own entity, it's just the subsection of the IRC that you do your taxes under.

This is categorically incorrect. S Corps and LLCs are formed under different statutes under state law and have different requirements/limitations under those laws. They are both treated as pass-through entities for tax purposes, and offer liability protection to their owners through the organization of the business, but they are similar in the areas that are usually critical when deciding what type of entity to form, but an S Corp IS it's own entity (a corporation, rather than an LLC), they are NOT identical and a company CANNOT be both.