Business Partner Issues

Discussion in 'Growing and Managing a Business' started by autobaron, Feb 12, 2011.

  1. autobaron

    autobaron
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    Good Afternoon:

    I am new to this forum and am glad to have found it. I have had a business for 5 years and wanted to expand. I brought on a business partner who I had known previously with the intention that he would fill an open position and also look after operations in the same town. I had moved out of town to open another operation. As with many others recently, my business is not what it used to be so we had decided to apply for a Line of Credit from the same bank I have dealt with during the last 5 years. This would help us out right now until business picks up in the spring. We were declined the LOC due to my new business partners bad credit. I had absolutely no idea his credit was so bad nor did I think to ask him before he came on board. This is now a significant issue as we are in a bit of a pickle with suppliers. So ultimately due to him, my business may suffer.

    So question is; how would I have him take responsibility for this current situation we are in due to him?

    Regards,
     
  2. Fergal

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    Welcome to our Business Forum autobaron. What does your business partner say about the situation, does he accept his role in it and is he prepared to do anything to help deal with it?

    It would probably be a good idea to ask the bank if there is anything you can do to resolve the situation.

    What country is the business based in and what legal structure does it use (e.g. partnership or limited company)?
     
  3. ArcSine

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    When Partner first came on board, (1) was it made explicitly clear that part of what he is expected to bring to the table is lending his personal balance sheet to help backstop business loans; and (2) was his percentage share of the partnership profits set with that expectation factored in?

    Note that (1) isn't always a given, if the entity is structured as a limited partnership or an LLC. In such cases, the situation you've described would only be an issue if Partner is expected or required to co-sign the credit line.

    But if both (1) and (2) are true, then his %age cut of the profits should be adjusted accordingly. Perhaps he's doing a bang-up job helping to manage the biz, but that's only part of what his cut of the profits is intended to compensate him for (again, IF both (1) and (2) are true).

    If you're in a situation whereby you want to retain his talent in helping run the business, but don't want or need his personal guarantee on biz loans (as his poor credit kills the chance of approval), yet the lender is requiring that all "partners" must co-sign, then maybe you can re-stack the blocks a bit so that he is a 'quasi-partner', without actually being one.

    In other words, set him up as an employee, with an annual bonus plan. The bonus is computed as a percentage of the net, and is designed to somewhat replicate the share of the bottom line he'd get under the original "partner" arrangement.

    There's a 101 ways the details might take shape, but you get the general idea. (For example, you'd need a provision that handles "loss" years to everyone's satisfaction.)
     
  4. autobaron

    autobaron
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    Fergal:

    The bank basically said that whilst he is in business with you, they will not move on their decision until such time his credit score is significantly better. The business is located in Canada and is a limited company. I have discussed this situation with him and he has agreed to look into it on his own to find out whether or not it is possible for him to either get a loan personally and loan it to the company or any other possibility.
     
  5. autobaron

    autobaron
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    ArcSine:

    Good points! #1 no it was not made clear and I suppose it was my fault for not outlining this. #2 no! Changing the structure of the company at this time to have him as an employee would I believe cause a loss of interest on his behalf! Depending on our financial situation in the short term, if something had to be done then I would certainly explore the option of structuring him as an employee.
     
  6. Fergal

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    That's a positive step. Alternatively, maybe he can do something to improve his credit score, to bring it to a level where the bank would be prepared to make the loan to your company.

    Perhaps you could overcome this by offering him a share of the profits. Hence, the better the company does, the better he will do.
     

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