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.

[ghak99]

Originally Posted by Molitoth

friends + money = enemies

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

[BIG_DADDY]

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.

[BIG_DADDY]

Originally Posted by the Talking Can

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

Been doing it since 96

[tooge]

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.

[Ace Gunner]

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.

[LOCOChief]

#3

[Rain Man]

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.

[jiveturkey]

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

[Saul Good]

Originally Posted by Phobia

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.

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.

[Saul Good]

Originally Posted by jiveturkey

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

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

[Lzen]

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.

[Ace Gunner]

Originally Posted by Rain Man

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.

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.

[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.

[Ace Gunner]

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.

[Ace Gunner]

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.