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    4 Replies Latest reply on Oct 14, 2008 7:22 PM by ARIZONAGAL1

    Partner buyout when the company is losing money...

    Artisan Newbie
      We have a general contracting company that is a little more than a year old. We have three partners in this company and one is leaving. The company is in dept with taxes a little bit and we have jobs for the next month.The partner leaving is wanting to be bought out and we would like to be fare. Can anyone give me advise to make this go easy. Also what would be the value of a company that owes more than what its sales are in the next month. There isn't a whole lot of assets. Is there anything owed to that partner?
        • Re: Partner buyout when the company is losing money...
          GrowthCurve Adventurer
          Normally the way to approach this situation is to value the business professionally, then deduct a percentage for the fact that your partner (probably) has a minority interest. A minority interest is always worth less because, by itself, it can not control the business or make decisions for it.

          Just based on what you're saying, though, I think the partner would be content to just walk away from his share in the business. I wouldn't say that the business has much value because it doesn't have much in the way of reliable future earnings or assets.

          Perhaps you could agree that the partner is entitled to his share of the profits from the jobs that are already lined up, less his share of the liabilities that are owed by the business. To me, this seems like the cleanest, easiest, and least costly approach.
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            • Re: Partner buyout when the company is losing money...
              Artisan Newbie

              This partner is actually looking to get payed for back pay that we didnt get within this last year. Which was alot of the marketing tools that we will still be using. But the big argument is that the other two partners arent going to get caught up on that either. Is it fair to ask for back pay?
                • Re: Partner buyout when the company is losing money...
                  GrowthCurve Adventurer

                  I don't quite understand what you mean by "back pay."

                  When you're a partner, you don't really get "pay," you get a share of the profits. You might draw a salary or some other form on compensation on a regular basis so that you can pay your bills, but when all is said and done, even that salary or compensation has to come from earnings from the business (you probably wouldn't pay yourself a salary with the capital you invested in the business).

                  Are you saying that he's got time invested in previous jobs for which he's not been paid? And if he exits the business, he wants to get paid for that work? If so, I think this could go either way.


                  On one hand, being a partner means that you share in the losses when you have bad times, and you share in the rewards when you have good times. If your partner chooses to leave the business now, but he wants to be paid for his time, you could argue that what he's basically asking for is to recoup some of his losses that the business incurred while he was a partner.


                  Well, that's just not how partnerships work, unless you have it in writing to the contrary. If he was going to be paid for his time regardless of whether the business earns a profit, then that's more like being an employee than a partner. If he was going to enjoy upside when things went well, he has to expect that there's a downside when things do not work out. Otherwise, he's getting all of the potential reward without any of the risk. Again, that's not how true partnerships work.


                  On the other hand, let's say that your partner didn't collect $10,000 (just for illustrative purposes) in earnings from the business because the company used the money to buy a new piece of equipment that cost $30,000 (you said there were three partners). If your partner leaves the business, the business will still have that piece of equipment, and it's an asset with value. I think it would be right for the other partners to pay the partner who is leaving for his share of the asset, depending on what its value is today.

                  When all is said and done, most contracting businesses are worth little more than their "book value." Given that your business is small and unprofitable, I think "book value" is fair when trying to determine a value for your business.

                  I suggest that you look at all of the assets that the business has and come up with a fair market value for them. I don't know what "marketing tools" you have, but if they have value today, include them.

                  The next step is to add up all of the liabilities of the business, including all of the tax debts. Make sure you include everything. However, do not include a liability for the money he thinks he's owed, unless you're going to do that for all partners.

                  Subtract the liabilities from the assets, and that's the "book value" (actually, "fair market value" is probably more accurate here) of the business. If your partner is a 33.3% owner, then he's probably entitled to payment of one-third of this fair market value.

                  (Please note that this is not the traditional "book value" that you'd use if you were using financial statements. If you were using financial statements, the assets would not be priced using their fair market value. I don't want to overcomplicate this, though.)

                  If the business has a negative fair market value, I would not expect to turn the tables on him and ask for a capital contribution, but you might let him know that he's actually getting a good deal by not having to repay his share of the losses.

                  All of this is a good example of why you really ought to put these things in writing when you start a business with other people. The topic of "buying out a partner" should be covered at the beginning, not at the end.

                  I hope this has helped.

                  1 of 1 people found this helpful
              • Re: Partner buyout when the company is losing money...
                ARIZONAGAL1 Newbie
                I would advise a lawyer.
                I am not a lawyer but have consulted my lawyer on a similiar situation.
                Basically the partner is entiltled to nothing.
                He owns 1/3 of the "Debt" that the company currently holds..
                Unless there is paperwork stating otherwise.
                He can let the other two partners keep his debt and have a lawyer do up the paper work stating that he is walking away and will not be responsible for his part of the companies current debt.
                Sounds like he is trying to walk away from a bad situation on the plus side.
                When you start a company you hope for the best, all partners add "capitol contributions" and hope for the best.
                If it doesn't work out then EVERYBODY loses.
                Did he add anything at the companies start up (capitol contribution)?