Most frequently, partners in a small business are very close friends, family, or long term trusted sweat equity business relationships.
Perhaps one of the most difficult challenges confronting this relationship is how to break it up when the time is right. There are always many emotional issues which I can not work out for you, but the equalizer is found in how a buy out is accomplished and most important what the price and terms are. If its fair the relationship and the business have a chance of surviving. if it is not fair, more then likely it will either not occur at all or the relationship will end, with a long term very negative air, a huge personal loss as well a strong likelihood the business will either suffer or cease to operate.
Here is a way to resolve this difficult transition, safely and respectfully for both partners in a buy out situation.
Partnerships break up for many reasons. Some personal, some financial, some ego driven. When this happens there are two important goals which must be achieved:
1. preservation of the business
2. preservation of the relationship
There is only one way to accomplish this:
With a fair deal for both sides. If adequate consideration is paid, and the process was not injurious to the players, and if the terms of the payoff are agreeable to both sides, then everyone will survive even if there are a few ruffled feathers.
The devastation and destruction which so frequently is associated with partnership break ups can be overcome, if a buy out plan is established in the beginning of the relationship. If everyone agrees on it at the onset When a breakup occurs and the plan must be utilized everyone will remember they already agreed to this process, it was fair when they agreed so it must be fair now, and disagreement is less likely to occur.
Thus I have a strategy that either partner can invoke, knowing the potential consequences, thus it is only utilized if the partner is truly ready.
Here is the deal, simple, honest and fun…everyone wins, but know one knows who will be the surviving partner until the strategy is played out.
First, it is important that both partners have a full grasp of the numbers: the asset value, the good will value, accounts receivable, account payable an income statement and a balance sheet.
Then the partner wanting to get rid of the other partner and buy him/her out makes an offer. The offer had best be as high as reasonable because if the opposing partner chooses, he/she can turn around and using that number offered to him/her, can opt to buy out the original offering partner for that price he/she offered.
The original offering partner can up the ante and offer more, but the game is over and the second partner the one who was first offered too and now exercised his option and made a turn around offer with the same number which is now binding on the original offering partner may at his/her choice either accept the new counter offer or demand the first offering partner accept his turned around counter offer at the original price offered and be bought out.
This process creates equality, is respectful and assures fair value for the partner being bought out, whichever one it may be.
In addition at the beginning when this plan is agreed to, the terms of the deal are also agreed to and since no one ever has cash, and to make certain the two partners can both implement the buy out, the agreement further states that the bought out partner will accept a note for five years at 8% interest payable monthly.
This works. The offering price by the first partner is high as the offering partner knows if its too low the other will buy him out for the same price. If its high enough the other partner may accept it, either way its respectable, affordable and a win for both. The business and the relationship can be spared destruction which so usually occurs.
If you have a 50-50 relationship and have not considered exit strategies for an individual partner, add this strategy at your next board meeting, its not to late.
I have seen it work and its a beautiful thing. Call for help 413-549-2966.
June 5, 2009 at 7:18 pm06
Hi… Iam in an PA with 2 of my partners… a private physician group… my contracts says I will be eligible for partnership once I get my green card approved and this did happen. I was told verbally that no buy in 2 years ago and I’ve been treated like a partner with the bonuses. My question is Iam about to leave my group to go back to school/ education and am I entitled to the equity in our office that includes expensive equipment or not ? 80% of the loan I believe on it has been paid ( and I contributed to that)
June 17, 2009 at 7:18 am06
No, you are not a partner…
March 21, 2009 at 7:18 pm03
Hi i stumbled across this page while i was looking up “partnership profit loss”
basically i am in a partnership with my aunt 50-50. and i want her to buy me out. we’ve already made a contract that she will pay me 75,000. at the beginning of the company we both put in 95000 each which was 4 months ago. we had a cpa calculate profits and losses, it was loss for 30000. now she wants to take 15 thousand from my 75, and she is only going to pay me 60,000 is this right ??? or is she over her head. shouldn’t the loss be taken from the 95? that i initially put in? please help, my mom she is stressing over this and my aunt said to me “i’ll see you court” since i wouldn’t give her a bill of sale because i did not agree with her deducting from the 75000.
March 22, 2009 at 7:18 am03
Valuation is always a challenge and is the topic of many discussions. Unfortunately the business is too young to know whether or not the losses will continue or its just part of the start up ramp. However in a classic sense, if the business is losing money the business is only worth the value of the assets, which i am unaware of. if the business is making money then one can experience a multiplier based on the profitability. In this case with only a 4 month track record, who knows were it is going. I also am not sure how the $75,000 buy out was decided upon, as it may be that the $15,000 was already deducted from your buy in of $90,000. thus accounting for it. That would make sense to me, however not knowing how the $75,000 figure was derived this too is conjecture.
My opinion without any knowledge at all, is the business is too new to know what it is worth and since you both put in $90,000 and you want out, after only four months of operation, it seems correct that you deduct the $15,000 from the $90,000 and pay her the $75,000 offered, recognizing the $15,000 , your share of the loss. Makes sense to me . That being said, if the business is a loser, take the 60,000 and run as soon it will be worth less and less, thus while this may be short, it also may be the highest amount you will see. On the other hand if you truly believe the business will become profitable then hang in and wait the turnaround and gain on your investment. My guess is you have lost faith quickly and thus want to cut and run, and if this is the case take the 60,000 and run whether it is the right number or not, it may be the best move for you given the reality of its losses and the down economy we are in.
Further given the aunt relationship, what choice do you have?
My question is why so soon? and depending upon that answer I bet my conclusion would be take what ever you can get and consider yourself fortunate she has the cash to buy you out.
Peace.
March 5, 2009 at 7:18 pm03
i have a 50/50 partnership, no partnership agreement was signed. He does majority of sales and I do majority of administrative. He feels he does most sales and is “entitled”. We are both unhappy with patnership. I want him to buy me out of company. Is it fair to ask for initial start up cost and 2 yrs compensation of all work put in to develop system for running company? If he does not agree, can I request the dissolution of company and he start fresh?
March 6, 2009 at 7:18 am03
First, while fair, it also depends upon what he business is worth, how much it is making and what relationship your investment has to your buy out…the concepts are fair what do the numbers say? Yes you can ask fir a dissolution, but that will be destructive to both of you and will require a costly law suit, no a good idea a all. Work it out, both need to make compromises, disaster fro liquidation should not be an option.
October 15, 2008 at 7:18 am10
you have a problem, but if you offer him a reasonable buy out price and schedule it over time so it can be paid it should work out. In the courts the judge will ordr a liquidation of the assets which will rob you both of any value although you could buy the business for cheap at that time if he forces you too, perhqps a little reality talk will help he has no choice one of you has to survive one of you has to go…call me if you want help.
don 413-687=8388
October 15, 2008 at 7:18 am10
I am in a 50/50 partnership with someone I went into business with 4 years ago. We were friends and nothing formal was ever written up. The business is fairly successful, but my business partner has been for the past couple of years very lazy and contibutes nothing towards the business. I would like to continue the business without him, but what if he refuses to sell his share?? Or even worse… sells his share to someone else??
September 30, 2008 at 7:18 am09
Yes, organize as an LLC and you can split profits and ownershiop any way you choose…Cannot recommend a lawyer in Manhattan, do not know one.
don
September 30, 2008 at 7:18 am09
thanks for your help Don. So lets say we go with a 51% and 49%, can we still have a 50-50 money split on earnings? or it doesn`t work that way ? I am searching for a lawyer in New York to help us set up the partnership agreement, any idea or suggestions ?
thanks again for the help!
james
September 29, 2008 at 7:18 pm09
Thats easy, do not do a 50-50% split, no matter who has the extra point it is important that the two of you decide who will have the last word.
It is impossible for me to decide for you, as I do not have the appropriate info, but one of you must be the lead man, or the money investor, the majority tends to follow the cash invested but if that is equal there must be some advantage one of you brings to the partnership that should warrant final decision making authority…if not then flip a coint but ther winer has won big, final word, the tie breaker.
Don
September 29, 2008 at 7:18 am09
Hi Donald, I am deciding on starting a general construction company in New York City with a friend as a partner. I heard alot about the 50/50 split. Looks like its best that one partner has a larger percentage lets say 51% and 49%. The question is which one of us will have 51% or 49% ? How do we decide? What do you suggest ? What if we decide to go with a 50/50 split ?
Thanks very much for your knowlegde and for this great info!
September 8, 2008 at 7:18 pm09
Its probably too late for that, but you can have the business and or your partner agree to imdemnify you and back you for a share of the note spreading the risk between the partners, but its probably too late to redraft it in the name of the business, unlikely.
September 8, 2008 at 7:18 pm09
I appreciate the information you’ve offered but was wondering if the company has just started and there is loans not in the partners name. How do I make sure the loans are on the business and not me anymore.