Dissolving a business partnership
Discussion
Any advice or opinions on the following would be greatly appreciated.
I am in a business partnership with Bob (not his real name), who has lost all interest and I will be buying him out. The partnership was established 5 years ago, without any written partnership agreement as we knew each other well and had worked together previously for several years (silly me).
It is a very small and simple business. We provide consultancy services from a rented office; the only assets are office furniture and equipment and there are no employees. There are no business debts, loans or creditors. The main sources of business are our website (50%), repeat clients (40%) and recommendations/ referrals (10%). We each contributed 50% to the business start-up costs, which were very small.
Bob has been under-performing for at least the last 2 years, relying on me to bring in most of the work. In the last 12 months Bob’s fee income has been roughly equivalent to his drawings i.e. I have covered 100% of the business costs and overheads. We each draw the same amount every month, despite me contributing 70% of the business fee income in the last 12 months. I have a meeting with Bob on Wednesday to discuss the dissolution and I need help regarding the following please.
1. Are we regarded (in law) as being 50/50 partners?
2. Regarding the buy-out figure, what should be taken into consideration and how will this be calculated? There is value in the website, and there is goodwill but about 90% of that is mine (very few of Bob’s clients come back as he has become so demoralised).
3. Can I use Bob’s past lack of financial contributions to reduce the final settlement figure?
4. Any other ammunition that I can use?
Many thanks.
I am in a business partnership with Bob (not his real name), who has lost all interest and I will be buying him out. The partnership was established 5 years ago, without any written partnership agreement as we knew each other well and had worked together previously for several years (silly me).
It is a very small and simple business. We provide consultancy services from a rented office; the only assets are office furniture and equipment and there are no employees. There are no business debts, loans or creditors. The main sources of business are our website (50%), repeat clients (40%) and recommendations/ referrals (10%). We each contributed 50% to the business start-up costs, which were very small.
Bob has been under-performing for at least the last 2 years, relying on me to bring in most of the work. In the last 12 months Bob’s fee income has been roughly equivalent to his drawings i.e. I have covered 100% of the business costs and overheads. We each draw the same amount every month, despite me contributing 70% of the business fee income in the last 12 months. I have a meeting with Bob on Wednesday to discuss the dissolution and I need help regarding the following please.
1. Are we regarded (in law) as being 50/50 partners?
2. Regarding the buy-out figure, what should be taken into consideration and how will this be calculated? There is value in the website, and there is goodwill but about 90% of that is mine (very few of Bob’s clients come back as he has become so demoralised).
3. Can I use Bob’s past lack of financial contributions to reduce the final settlement figure?
4. Any other ammunition that I can use?
Many thanks.
Hi Rowley....
I'm sure you'll get a few responses to this as despite all the advice, friends keep on setting up businesses together without partnership agreements... Me included... I have that useful scar and T Shirt.
If the share holding is 50/50 then it's quite difficult to argue that you can buy him out for less than 50% of the value of the business, regardless of the effort employed in that business.
Your accountant should be able to settle on a fair value of the business. Keep it independent and fair... There's a starting figure for you to work with and you could perhaps pay some now, some out of future revenues..
How you approach your business partner is crucial... Keeping it fair and non accusatory may engender a fair response from him... The moment you start splitting hairs on who brought in what in and when, then you run the risk of:
1. Him sabotaging the business.. E.g. Not turning up, unexpected expenses, not servicing clients., switching things off etc
2. Forming a toxic work environment you'll both hate ...
3. Endless time wasting arguments which are stressful and non productive.
Naturally I understand that you may feel entitled to more of a share, but take a longer view. If by jettisoning your partner now you feel you can grow the business and make more of it, then the (perceived) hit now will feel neglible in the future...
What sort of turnover is involved here?
I'm sure you'll get a few responses to this as despite all the advice, friends keep on setting up businesses together without partnership agreements... Me included... I have that useful scar and T Shirt.
If the share holding is 50/50 then it's quite difficult to argue that you can buy him out for less than 50% of the value of the business, regardless of the effort employed in that business.
Your accountant should be able to settle on a fair value of the business. Keep it independent and fair... There's a starting figure for you to work with and you could perhaps pay some now, some out of future revenues..
How you approach your business partner is crucial... Keeping it fair and non accusatory may engender a fair response from him... The moment you start splitting hairs on who brought in what in and when, then you run the risk of:
1. Him sabotaging the business.. E.g. Not turning up, unexpected expenses, not servicing clients., switching things off etc
2. Forming a toxic work environment you'll both hate ...
3. Endless time wasting arguments which are stressful and non productive.
Naturally I understand that you may feel entitled to more of a share, but take a longer view. If by jettisoning your partner now you feel you can grow the business and make more of it, then the (perceived) hit now will feel neglible in the future...
What sort of turnover is involved here?
rowley birkin said:
Quite simply it would fold and 5 years' hard work would have been for nothing. That's not an option, although I won't be giving that impression on Wednesday !
Well that gives you the true value of his part of the business.Absent a partnership agreement I really can't see how it's worth more than his half of the assets if it will collapse if you stopped working.
Flip it round and ask him how much he will give you if you leave.
AndrewCrown said:
Hi Rowley....
I'm sure you'll get a few responses to this as despite all the advice, friends keep on setting up businesses together without partnership agreements... Me included... I have that useful scar and T Shirt.
If the share holding is 50/50 then it's quite difficult to argue that you can buy him out for less than 50% of the value of the business, regardless of the effort employed in that business.
Your accountant should be able to settle on a fair value of the business. Keep it independent and fair... There's a starting figure for you to work with and you could perhaps pay some now, some out of future revenues..
How you approach your business partner is crucial... Keeping it fair and non accusatory may engender a fair response from him... The moment you start splitting hairs on who brought in what in and when, then you run the risk of:
1. Him sabotaging the business.. E.g. Not turning up, unexpected expenses, not servicing clients., switching things off etc
2. Forming a toxic work environment you'll both hate ...
3. Endless time wasting arguments which are stressful and non productive.
Naturally I understand that you may feel entitled to more of a share, but take a longer view. If by jettisoning your partner now you feel you can grow the business and make more of it, then the (perceived) hit now will feel neglible in the future...
What sort of turnover is involved here?
Many thanks Andrew, you have said exactly what I was thinking regarding how to approach Bob; he could easily cause all sorts of problems if things turn nasty and as you say the 'perceived hit' is probably worth it as I can grow the business quite nicely without him. We are not talking massive sums here, but enough for a reasonable standard of living without a lot of effort. I'm sure you'll get a few responses to this as despite all the advice, friends keep on setting up businesses together without partnership agreements... Me included... I have that useful scar and T Shirt.
If the share holding is 50/50 then it's quite difficult to argue that you can buy him out for less than 50% of the value of the business, regardless of the effort employed in that business.
Your accountant should be able to settle on a fair value of the business. Keep it independent and fair... There's a starting figure for you to work with and you could perhaps pay some now, some out of future revenues..
How you approach your business partner is crucial... Keeping it fair and non accusatory may engender a fair response from him... The moment you start splitting hairs on who brought in what in and when, then you run the risk of:
1. Him sabotaging the business.. E.g. Not turning up, unexpected expenses, not servicing clients., switching things off etc
2. Forming a toxic work environment you'll both hate ...
3. Endless time wasting arguments which are stressful and non productive.
Naturally I understand that you may feel entitled to more of a share, but take a longer view. If by jettisoning your partner now you feel you can grow the business and make more of it, then the (perceived) hit now will feel neglible in the future...
What sort of turnover is involved here?
desolate said:
rowley birkin said:
Quite simply it would fold and 5 years' hard work would have been for nothing. That's not an option, although I won't be giving that impression on Wednesday !
Well that gives you the true value of his part of the business.Absent a partnership agreement I really can't see how it's worth more than his half of the assets if it will collapse if you stopped working.
Flip it round and ask him how much he will give you if you leave.
Eric Mc said:
You say "partnership". Is this a genuine "!partnership" or set up through some other structure such as a limited company?
On the assumption that it is a proper partnership, how have the business profits (or losses) been split over the five years of the operation?
Just 2 blokes in an office with laptops, nothing in writing whatsoever and no other business structure. Always been in profit, always split profits equally.On the assumption that it is a proper partnership, how have the business profits (or losses) been split over the five years of the operation?
If it's a partnership and without any agreement, the terms in the Partnership Act 1890 apply.
http://www.legislation.gov.uk/ukpga/Vict/53-54/39
http://www.legislation.gov.uk/ukpga/Vict/53-54/39
Right - that establishes the partnership as being essentially a 50/50 set up. So, without a formal agreement, the prima facie evidence is that it has to have been a 50/50 partnership - because that is how you split the profits.
Any other factors which you might claim shows that the partnership was not a 50/50 arrangement must be argued in the context that you were happy to divide the spoils of your efforts equally - and that you were happy to do that consistently over the five years of the partnership's existence.
Any other factors which you might claim shows that the partnership was not a 50/50 arrangement must be argued in the context that you were happy to divide the spoils of your efforts equally - and that you were happy to do that consistently over the five years of the partnership's existence.
Eric Mc said:
Right - that establishes the partnership as being essentially a 50/50 set up. So, without a formal agreement, the prima facie evidence is that it has to have been a 50/50 partnership - because that is how you split the profits.
Any other factors which you might claim shows that the partnership was not a 50/50 arrangement must be argued in the context that you were happy to divide the spoils of your efforts equally - and that you were happy to do that consistently over the five years of the partnership's existence.
Thanks Eric. I am trying to avoid arguments and just pay a fair price for the business going forward.Any other factors which you might claim shows that the partnership was not a 50/50 arrangement must be argued in the context that you were happy to divide the spoils of your efforts equally - and that you were happy to do that consistently over the five years of the partnership's existence.
At the end of the day, what you pay is what you can agree with the outgoing partner.
What I am saying is that, no matter how you feel about things (i.e. other partner not pulling his own weight etc), in the absence of any formal partnership agreement, the only evidence of how the partnership was arranged is the historical evidence of how the profits were split.
What I am saying is that, no matter how you feel about things (i.e. other partner not pulling his own weight etc), in the absence of any formal partnership agreement, the only evidence of how the partnership was arranged is the historical evidence of how the profits were split.
KevinCamaroSS said:
With the set up you have the value of the business is very low, no assets involved other than any cash balance. I would start by offering him the 50% of the set up costs that he put in. Point out his lack of contributions over the last couple of years.
Start-up capital was negligible (office furniture/ equipment etc. + laptops). There is value in the website/ domain name (generates approx. 50% of business) and goodwill from repeat clients (although most of those are mine). I also need to factor-in the costs and hassle of starting again from scratch if we can’t reach an agreement. If you're equal partners, that's equal for sharing profits and also debts, make sure that you get the partnership legally dissolved.
I have a friend whose lawyer failed to make a legally binding clean break and as a result, he acquired a business tax bill, which was not his, but he was still liable for.
I have a friend whose lawyer failed to make a legally binding clean break and as a result, he acquired a business tax bill, which was not his, but he was still liable for.
rowley birkin said:
Start-up capital was negligible (office furniture/ equipment etc. + laptops). There is value in the website/ domain name (generates approx. 50% of business) and goodwill from repeat clients (although most of those are mine). I also need to factor-in the costs and hassle of starting again from scratch if we can’t reach an agreement.
But you will not be starting again, you have all your existing repeat business. From your posts on this topic I do not put much value on the business at all, it is almost as if you worked independently.KevinCamaroSS said:
rowley birkin said:
Start-up capital was negligible (office furniture/ equipment etc. + laptops). There is value in the website/ domain name (generates approx. 50% of business) and goodwill from repeat clients (although most of those are mine). I also need to factor-in the costs and hassle of starting again from scratch if we can’t reach an agreement.
But you will not be starting again, you have all your existing repeat business. From your posts on this topic I do not put much value on the business at all, it is almost as if you worked independently.Gassing Station | Business | Top of Page | What's New | My Stuff