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.
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?
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.
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. Many thanks guys for all the helpful replies. Feeling much better about the negotiations on Wednesday and will be posting an update afterwards.
It is true that I have been working almost independently, certainly during the last 12 months, and it is also true that I wouldn’t be starting again entirely from scratch (my poor choice of words).
It looks like the only partnership asset with any value is the domain name/ website, which I would like to keep if at all possible as it brings in approx. 50% of fee income; any ideas on how to value?
Finally, I have heard that some outgoing partners have negotiated settlements based on their past fee income. Is this relevant in my circumstances, bearing in mind that there will be very little repeat business from the clients of the outgoing partner?
It is true that I have been working almost independently, certainly during the last 12 months, and it is also true that I wouldn’t be starting again entirely from scratch (my poor choice of words).
It looks like the only partnership asset with any value is the domain name/ website, which I would like to keep if at all possible as it brings in approx. 50% of fee income; any ideas on how to value?
Finally, I have heard that some outgoing partners have negotiated settlements based on their past fee income. Is this relevant in my circumstances, bearing in mind that there will be very little repeat business from the clients of the outgoing partner?
desolate said:
I would reiterate what I said the other day - ask him how much he would pay you. It's as good a way as any of starting the negotiation.
I can't see how past fee income is relevant in this matter, unless your current partner is prepared to enter into a long term non-compete agreement.
He's quite shrewd, and I think he would see through this tactic and put a high figure on my value. Furthermore he doesn't want to carry on in our line of business - he definitely wants out.I can't see how past fee income is relevant in this matter, unless your current partner is prepared to enter into a long term non-compete agreement.
Bill said:
Have you discussed his poor performance and lack of interest before this, or is this the first he's hearing of it?
There's little inherent value in the business so I'd approach from the standpoint of adjusting drawings to match income, and then looking to see if he will resign if that doesn't work out.
He is definitely going Bill, and he is well aware of his poor performance. The only question is can we agree on a buy-out figure (preferred option) as opposed to a full winding-up.There's little inherent value in the business so I'd approach from the standpoint of adjusting drawings to match income, and then looking to see if he will resign if that doesn't work out.
desolate said:
So if he puts a high value on you, say 'wow that's great thanks. A cheque will be fine'
And use the money to set up your own website and pay for some key word bidding.
edited to add: if what you said above is true and the business would fail without you, then his bit really is worthless beyond net asset value.
He won't give me a cheque, because he doesn't want to carry on. And use the money to set up your own website and pay for some key word bidding.
edited to add: if what you said above is true and the business would fail without you, then his bit really is worthless beyond net asset value.
The website has value to me but not to him - I need to buy his 50% interest in the website.
desolate said:
rowley birkin said:
He won't give me a cheque, because he doesn't want to carry on.
The website has value to me but not to him - I need to buy his 50% interest in the website.
So I think you have your answer - the business is worth nothing other than to you.The website has value to me but not to him - I need to buy his 50% interest in the website.
So the value is whatever you want it to be.
I would still ask him what he wants - then you know whether it's worth trying to reach a figure you will both be happy with or whether the energy would be best spent starting again.
If he thinks it's worth 100K and you think 5K - neither of you are ever going to reach a figure you a both happy with so why bother?
Bill said:
rowley birkin said:
He is definitely going Bill, and he is well aware of his poor performance. The only question is can we agree on a buy-out figure (preferred option) as opposed to a full winding-up.
Ah, ok. I'd say he's already had enough with you carrying the running costs for a while, he should be glad to get out with a share of the asset value imo.desolate said:
AndrewCrown said:
Desolate... Chill... I certainly wasn't directing or commenting on your post...if it came across that way it was unintentional...(;
Smiley thing with a thumbs up. 
Andrew I still intend to avoid confrontation and to pay a fair price; desolate has helped me to quantify what that price should be. Big thanks to both of you.
Just to update this thread, my meeting with outgoing partner took place today but no final decision yet. He refused to suggest a figure for me to buy him out, placing the ball in my court, so I am e-mailing him a take-it-or-leave-it offer of £3.5k. If he declines then he gets nowt from me; I will then incur the additional hassle of setting up a new business, but at least I will be £3.5k better-off.
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