• This topic has 16 replies, 12 voices, and was last updated 15 years ago by hora.
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  • Buying out a business partner Q
  • oldgit
    Free Member

    Obviously I need to speak to a solicitor first but I thought I’d run it through here for some opinions.

    I was a sole trader but last year one of my employess helped me out financially during a tight spot. He had been wanting to come in as a partner, so we agreed that his financial input gave him a share in the business.
    Recently I sold the business to a larger competitor, nothing much has changed for us apart from me know being a director and shareholder. However, the other partner wants to be bought out but remain an employee.
    We have agreed to do this but the fly in the ointment is the fact he is insisting on the interest on the money he put in, he used his credit card to buy a share of the old business.
    Now cruel as it might seem I don’t think he is entitled to that as that was his choice to pay that way.
    I did’nt realise what a nightmare I was getting into with this guy, he only wanted to be recognised as a partner in good times and not the bad.
    What he does’nt realise is that he would be in no place to barter if we pay him off and could lose his job if he kicks off.

    Free Member

    I think thats fair- interest. After all, he helped out in a tight spot. He would still have owed the money to his credit card company regardless if your company had then folded/closed down.

    Free Member

    Surely be bought a ‘share’ of the business and he will now get back what that ‘share’ is now worth? If it was a loan then yes he would be due interest, but doesn’t seem like a loan to me.

    Free Member

    ….can of worms!!

    As a sole trader, did you agree to an equity stake of your business for his investment (contract?) – short or long term? Did you switch over to a partnership of Ltd company format with him on board?

    The loose reality is that as an equity stake holder, now that the company has been bought out, he stake is potentially worth more (usually a hard one to define)….depending on the depth of your previous agreement with him.

    There’s an argument to suggest that his investment has rolled out quite well…..as he’s not interested in taking a share option for his existing stake then it’s not unreasonable to expect a return….from a cost of capital perspective, you got his financial support cheaply!!

    Remember, depending on the extent of the legalities drawn up when he got on board, there’s no guarantee that he has to sell his equity stake back to you or the new parent company!!

    You got a reasonably cheap, low maintenance loan there……pay the lad a fair return and make hay!

    Full Member

    Did you have any kind of written agreement? If not, I’d probably work on the theory that he bought a share in the business, and he’s now selling that share, so if the business is worth less now, he’s lost out, but if it’s worth more, he’s entitled to a proportion of the increase in value. Trying to claim he’s entitled to the interest it cost him is an interesting concept, but may or may not work out cheaper than the present value of his investment…

    Free Member

    I agree with the % of the business he bought = % of the business value he needs to be paid now to buy him out.

    Free Member

    It’s borderline a loan!
    However it was put in writing that it was to buy a % share in the business and it was to remain in the business.

    Free Member

    Trying to understand this

    1) You were in money troubles
    2) He put his hand in his pocket and helped you out in return for a share of the business. What share? This doesnt strike me as someone “he only wanted to be recognised as a partner in good times and not the bad”. Surely its the other way around. You recognised him as a partner when you needed him, now you are ditching him.
    3)You sold the business that belonged to you AND HIM to a bigger competitor for an amount of money/shares/directorship
    4) Surely a value was put on the business at the time
    5) If he owned 10% of the business for his financial input (Regardless of the amount and how he paid) then he should get 10% of its worth when you sold it. Thats the risk of business. If your business had folded he would have lost the money he had risked. Cake & Eat it springs to mind

    If i was him i would be thinking i had helped you out in your time of need and you are shafting me something stupid now that you have seen yourself right.

    Please tell me where i have missunderstood this

    Free Member

    …bit of an after thought…

    …was the buy-out figure reasonable as far as the goodwill multiplier?

    A simple & clean method of share value could be to convert his % company share as a function of the sale price that you got from the competitor.

    Might not work out 100% in your favour if you set the business up from scratch etc and the sale price reflected this in the goodwill value…..but, other than that…..it gives you a true market value with which to wok share prices out…..

    Free Member

    Buy the time we sold out the business was worthless, the new company came on board with support that has paid off and we are now going very well.

    I mentioned the word nightmare earlier. When he became a partner he hardly ever came to work (this is well documented) If I was out on business I would sometimes return to find he had closed and gone home. If a customer paid he was getting cheques paid out directly to him.
    The money he put in got me out of trouble yes I agree, but I could have sorted it in matter of days. I had also refused previous requests from him to become a partner in return of a small investment.
    I do blame him squarely for the decline the business went through when he signed up. I’ve always had to deal with any ‘problem’ issues as he has always claimed that was and is nothing to do with him i.e payment demands.
    The last things he did were to order a lease car and three year ‘Blackberry’ contract conveiniently in my name only.

    Free Member

    I struggle to understand from this if he was really a partner at all.

    If you were still a sole trader then he wasn’t. Did you set up a LLP or Ltd company?

    Either way, it’s not reasonable for him to expect you to pay the interest on the credit card bill that he incurred in buying into the business. That was his decision.

    Free Member

    You’ve cocked this up by not getting a lawyer involved when he bought a partnership.

    Now you need a lawyer to sort out the mess.

    Free Member

    Get a lawyer involved straight away and bring any emails, letters or contracts that mention the “partnership”.

    Sometimes being a nice guy in business just gets you f*cked over. Only you can decide how aggressive to be about it but it sounds like you need to sort it out quickly and be very aware that your partner could still be looking for ways to strengthen his case.

    Free Member

    Sounds like you’d do better being rid of him.

    Unless it was specified in your contract with him, that the business would pay his interest on the card debt, I wouldn’t have thought he had a leg to stand on.

    Go and see a solicitor though to see exactly where you stand.

    Full Member

    Some info for the barrack room lawyers:

    Partnerships may exist in writing or “at will”. Each is equally binding, though evidentially, having something properly documented always helps.

    If you agreed that his financial input would by a stake in your business (as sole trader), then you probably became partners at the point he paid his money.

    If you then sold the business, you either sold the whole business (in which case, his share ought to be recognised in the proceeds). If you sold only your share, he is arguably a partner with the buyer.

    The buyer of the business clearly didn’t do its due diligence, otherwise it would have been resolved then. Either that, or you were badly advised and have given all sorts of protections to the buyer you don’t really understand.

    It is clear that, notwithstanding your “partner’s” financial input, he has certainly had a return from the business. Would you say that his cash return has been more than, less than or equal to the amount he put in?

    You need to understand what sort of sum he is looking for as a go away and shut up approach. If this is too much, or if he clearly won’t go away, then you may need to involve a lawyer. You need someone who has a specialism in partnership law.

    Free Member

    That makes more sense Oldgit. Sorry but it came across at first that you had come out of it well and left him behind.

    If the supposed partnership had little to no value at the time of the takeover (Was this documented?) then i would say that he owned his pecentage of nothing 🙂 Unlucky to him.

    As long as you documented his investment at the time and when you sold the business. You did, didnt you?

    Free Member

    Spade. Offer him a choice, it’ll change his life (well end it) 😐

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