Opinions and advice welcome on difficult circumstances

Discussion in 'Growing and Managing a Business' started by Golden, May 15, 2013.

  1. Golden

    Golden
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    I'm a first time business owner of a start up. I'm the sole investor with one partner, ive spent roughly $60,000 and am also the only one working for the business full time. The business has been in operation for about 6 months, and the other partner I have is looking for 50% ownership; he's invested no money and has a full time job somewhere else. He is able to work for our company maybe once a week. His sweat equity in the building stage of the company was less than mine by a huge measure and he feels he should be at 50%, I feel 50% will come later, but right now my investment is at risk due to being a brand new business, and I've invested much more sweat equity. Any thoughts?
     
  2. Fergal

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    Welcome to Business Advice Forum Golden, thanks for joining and posting your business questions.

    From what you say it sounds as if your partner is not entitled to anything like 50%. Do you have a partnership agreement of any kind in place? If not I'd suggest that you and your partner try to agree one and sign it as soon as possible. You might find this article helpful - What should be in a business partnership agreement!

    Has your partner given you any justification as to why he believes he is entitled to so much?
     
  3. Golden

    Golden
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    We have a legalzoom agreement that says he is at 40% and me 60%. It used to be a three way partnership at 33% each then the other partner bowed out, now it's the two of us. he hasn't given any real reasons, just that he thinks it should be equal. It seems ludicrous to us, but that's what he wants. Thanks for responding, I appreciate any input
     
  4. Golden

    Golden
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    I should add that when we formed the partnership, all three of us had plans to be working at the new business full time, but that has not been the case; the one who bowed out had to leave to work elsewhere at a paying job; the other one who remains in this new business never left his paying job. So, being the one who has invested every penny and is the only one working at the business, I feel 40% is generous for the other guy who hasn't put in any money, and works once a week, and sporadically at that. Any input is appreciated
     
  5. eurekapsycrille

    eurekapsycrille
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    When it comes to business, it's always better to base upon the "papers". If everything is legally settled (shares, money, ownership, whatsoever) in the beginning of the deal, then you shouldn't worry about him begging for a 50% ownership whereas you both agreed with 60-40 in the beginning.

    Remind him that you have that kind of agreement. If he still insist what he wants, then it's strongly advised that you have to do necessary things to keep your business running with him getting the 40% share. As you said, you are too generous to give that guy that kind of share especially for a start-up business and him who only works once a week.

    Business is business. And that's not something that can be settled on verbal deals. It should be legally done by papers and both of you must comply.
     
  6. Ted

    Ted
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    Part of the reason why you should not use a company like Legal Zoom is because they don't provide legal advice. If you had hired an attorney to draw up your partnership agreement, any attorney worth their salt would have told you that you need to create a provision for what is going to happen if one of the partners wants out for any reason. That attorney would have forced you guys into deciding these matters before you ever got started with your company.

    So, my advice to you would be for the two of you to air out your differences of opinion. Then I would find a local business attorney and have the partnership papers rewritten according to the terms that you agree upon. That attorney should present you with possible situations to consider so that you two figure out the solution before those situations arise.

    I am assuming you are telling us the whole story. If you are, then I don't see how this other person would ever expect a 50% stake in a company that he contributed zero equity into. No reasonable person would expect that. It just doesn't make logical sense. So either 1) this person is not someone you should have ever partnered with (greedy and unreasonable) or 2) there are other factors that this partner is thinking about that you haven't told us about.
     
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  7. Golden

    Golden
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    I appreciate the input; our conclusion is that we never should have partnered up with him, no investment $ and infrequent work and even availability. My thoughts were as above, but being a first time business owner, just wanted to confirm that I'm not out to lunch on it. Thanks again, will update on any progress
     
  8. ArcSine

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    Golden, going strictly off of what you've described so far, I'm not bullish on this partner ever morphing into a valuable asset and ally for you. His unrealistic expectations point toward a succession of headaches and regrets for you for as long as this collaboration hobbles along down the road. The current difficulties with him which have lead you to this forum can be thought of as a sneak preview of coming attractions.

    Maybe this guy has some rare business talent such that profits and cash flow spring up like wildflowers wherever he treads, and you're willing to pick out all the brown M&Ms to keep this rock star performing on your stage. That's fine if so (plenty of successful businesses operate on such a model) but your post didn't give the impression that this was the case here. It sounds more like the recipe for a rewarding and happy collaboration involves a different partner, one with similar talents but more realistic expectations.

    If for certain reasons, though, you feel it'd be better to make things work with the incumbent partner, then the 50/50 split he's looking for shouldn't happen until both efforts and capital have been brought into at least an approximate parity as between the two of you. Until such time, the profit split formula or mechanism clearly spelled out in your written agreement should take into account the disparity.

    For example, before any profit split is computed, some portion or percentage of the surplus cash flow should come out to you first, off the top, as a return of your capital. If this isn't feasible (because, e.g., the biz requires a certain base of capital and assets to be maintained) then you should instead receive a "preferred" return off the top representing a reasonable return on your ongoing investment. (A return of capital and a return on capital are different things.)

    The remaining profit (after the aforementioned return of/on capital is carved out) should be split in a way that takes into account the amount of time and effort you're each putting in. You might, for example, pay yourselves a small salary based on hours, then split any residual profits evenly.

    The basic idea is that you design some form of a three-tier allocation of profits. First there's a carve-out to you for a return of/on capital. Second, out comes a second slice of profits, based on hours worked. Then finally any remaining surplus gets the 50/50 treatment. That's the general picture; the details of course are up to you and driven by the particular facts and circumstances.

    Tell your partner he can have his 50/50 deal when and if the relative contributions of you and he to the biz are indeed equal. Note that this doesn't require equal contributions within each individual category. It's common to see one partner putting up the bulk of the capital, another bringing some sort of valuable intangible asset to the party (such as a lucrative government contract), and a third putting in the majority of the hours in the office. As long as they deem the value of these different contributions to be roughly equal, they're happy with an even three-way profit split. But again, your post doesn't suggest that your partner is making up for his deficit (in dollars at risk, and in labor hours) via some other intangible contribution.
     
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  9. Golden

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    Thanks for the great advice...my spouse and I are at the point that we've long recognized the headaches associated with this partnership, and will be in talks very soon to agree to go our separate ways. The partner would rather walk away than take less than 50%, so we're fine with that. We've been running the business for a couple months now solo (spouse and I), so we're quite comfortable with going forward in the same manner. Hindsight is 20/20 right? Wishing we knew ahead of time, but I guess that's not news to anyone; we're wiser for it at least. thanks again
     
  10. Ted

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    I think your attitude is a good one.

    Building a business is about moving forward. You are going to make many mistakes along the way. They are inevitable. You just need to learn from them, keep your chin up and keep moving forward, adjusting accordingly.

    No successful business owner I have ever met, and I know a lot of them, has a track record of never making mistakes. Most of us have made major mistakes, even boneheaded ones that make your situation look rather trivial. But, just as you seem to be doing here, we chalked them up to being a learning experience and kept moving forward.

    You should keep that attitude. It will serve you well in the years to come.

    Regards,
    Ted
     
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  11. Golden

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    Thanks for the encouragement; I talked with the partner today and he's offering to step out of the business, but he's wanting a monetary compensation for as he says, 100's of hours during the first 6 months. He hasn't decided yet what that will be; any advice? Am I obligated to pay him off? He kicked in no money, but worked some hours; as for it being as much as he says, I find it hard to believe, but have no way to disprove, just as he has no way to prove. The thing is, all three of us worked hours for free, him the least amount of all of us. I'm not sure what my options are, I don't want to approach a lawyer just yet, I'm hoping he'll be reasonable. I welcome advice!!
     
  12. AnushaJain

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    Golden ,you must do straight talk to your partner that without being an active member in your business how can he demand for equal shares.

    Apart from that legally indulge him in this matter.remind him that what you both have concluded about the partnership 60-40 beacause your finance is at risk,not his.he is your sleeping partner only.
     
  13. Golden

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    Lots of developments since last week, the other two partners have joined forces and want me to buy them out; my wife and I sought legal council today, and since we bought all the assets on a personal credit card in her name, and the store space is leased in my name as are the utilities, there are no assets for them to think they can get. we are leaving the llc behind and creating our own. Interesting times; as it turns out, what we were thinking of giving them out of a generous heart, they will get zero now and we are legally covered for it.
     
  14. amwarner

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    Let me make a point here ... by no means would it be fair to you to offer 50% of "your" company in which you put up the majority of the investment. Even some of the other comments I read here stating 40% of the company should be given to that person who contributed nothing so far, makes no sense to me.

    I never had experience with partnerships but maybe some of you could clarify this with me. Isn't it possible to start that other person at maybe 20% and they could possibly gain more equity as time goes on?

    I mean, from the sounds of it, Golden is the only one that is "serious" about doing the business. The first partner backed out of entrepreneurship because he got a job and the second one seems to have the hope of being a part-time entrepreneur while doing little to nothing at all.

    Seems like Golden is the only one taking it serious so why then should the "business partner" get such a high equity for not contributing anything?

    Just my opinion.

    - - - - Posts Merged - - - -

    And I just read the latest comment by Golden, good for you. It seemed asinine that the business partner(s) should get ANYTHING since they didn't contribute to the business.

    Lesson learned from that experience that Golden went through ... choose the people you're considering to partner with carefully.

    Hope it works out well for you Golden.
     
  15. Fergal

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    Yes that is possible and it is an approach often used when someone invests in a business which is run by the other partner. The partner working in the business increases their equity share once the business reaches certain targets. The important thing is that there is a partnership agreement in place that clearly specifies ownership and equity issues.
     
  16. Rachel S

    Rachel S
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    I think Partnership agreement is the key for you. You must divide your income with your partner by this agreement. Also I have posted some strategies that are really important to know of you. Just take a look below.

    1. Creativity problem
    2. Competition
    3. Financial
    4. Slow growth or advancement
    5. Poor Market Research
    6. Bad Business Plan

    So, I think you must take more care about these problems. Hope you may now continue your business with a large smile :)

    Have a great day :)

    Rachel !!!
     
  17. thealchemist

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    I think you should trust your gut in this situation. If the way you've described the situation is correct, then by no means is the other partner entitled to 50% of the business.
     
  18. aspecialist

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    • This post has been edited to remove a promotional link.
    As far as I know in business, if there is no written agreement between the partner the profit & losses should be shared equally. Partners should comply to each duty in the business including financial accounting. In your situation that your partner doesn't give a single penny to contribute in the investment then he should work on the full operation of the business to get the share he wants.
     

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