Business Partnership Split
Discussion
Hi all,
would really appreciate some basic advice on the following scenario:
My business partner and I have agreed to terminate our working relationship, with me retaining full rights to continue to operate the company (at present a partnership, but 'ghosting' as a Ltd company).
My business partner (from hereon referred to as P) has agreed to resign as a director of the ltd company with immediate effect. Thereafter, he has offered me all of his shares in the ltd company AFTER a period of 13 months - the time it will, reasonably, take me to pay back a loan he made to the company upon start-up, along with the deficit he is owed in drawings (I drew more than he in our first year of trading).
P says he will not relinquish his shares in the limited co until all monies have been paid.
However, would he be within his rights to demand a dividend payment from any retained profit prior to the expiry of the payback period, being as he currently owns the majority of the voting shares?
My suspicion is that this would entirely be his right, but I don't want this to happen under any circumstances.
Any advice gratefully received!
would really appreciate some basic advice on the following scenario:
My business partner and I have agreed to terminate our working relationship, with me retaining full rights to continue to operate the company (at present a partnership, but 'ghosting' as a Ltd company).
My business partner (from hereon referred to as P) has agreed to resign as a director of the ltd company with immediate effect. Thereafter, he has offered me all of his shares in the ltd company AFTER a period of 13 months - the time it will, reasonably, take me to pay back a loan he made to the company upon start-up, along with the deficit he is owed in drawings (I drew more than he in our first year of trading).
P says he will not relinquish his shares in the limited co until all monies have been paid.
However, would he be within his rights to demand a dividend payment from any retained profit prior to the expiry of the payback period, being as he currently owns the majority of the voting shares?
My suspicion is that this would entirely be his right, but I don't want this to happen under any circumstances.
Any advice gratefully received!
Edited by Fallon on Monday 14th April 17:21
Edited by Fallon on Monday 14th April 17:22
1)How many classes of shares does the ltd co have - and do all have voting rights/entitlement to dividends?
2)Who owns what propotion of which shares?
You can only pay dividends out of the company if you have control (50+%) or agreement between shareholders that amounts to 50+% to action the request. The dividend then must go to all shareholders in that class evenly as far as Im aware.
2)Who owns what propotion of which shares?
You can only pay dividends out of the company if you have control (50+%) or agreement between shareholders that amounts to 50+% to action the request. The dividend then must go to all shareholders in that class evenly as far as Im aware.
Exigeowner said:
Reading this and other posts / stories do partnerships ever actually work ? I know so many that end up badly, I dont even have a partner but just thinking about my partner in business makes me already resent him / her.
It can work. Not often. My unit is next door to a firm owned by partners who are still going strong after 20 years. My granite is supplied by partners who've are obviously still OK with each other after 5? yearsJust a question of finding somebody whose skills, assets and personality are a nice fit. Make sure the wives like each other too, or forget it.
DavidY: I did consider simply starting up again under a new name, but am loathe to do so for a couple of reasons:
1. we've built up a good reputation under the existing company name, and
2. (somewhat related to point 1.) the time and effort expended in a re-brand is time I can ill-afford when I really need to concentrate on gaining new clients.
EricMC: I see no reason why the business couldn't afford to pay what P is demanding over the next 13 months. My issue really lies with me being extremely irritated by him automatically assuming that he SHOULD get anything at all. It's essentially still a partnership, and therefore not subject to any hard and fast rules in the same way that a limited company would be.
However, I can see fairness in him reasonably requesting repayment of the loan.
Thing is, if I say 'up yours', he'll automatically kill off the limited company, then I'll HAVE to change the name and embark on a re-launch anyway.
Rock and a hard place?
1. we've built up a good reputation under the existing company name, and
2. (somewhat related to point 1.) the time and effort expended in a re-brand is time I can ill-afford when I really need to concentrate on gaining new clients.
EricMC: I see no reason why the business couldn't afford to pay what P is demanding over the next 13 months. My issue really lies with me being extremely irritated by him automatically assuming that he SHOULD get anything at all. It's essentially still a partnership, and therefore not subject to any hard and fast rules in the same way that a limited company would be.
However, I can see fairness in him reasonably requesting repayment of the loan.
Thing is, if I say 'up yours', he'll automatically kill off the limited company, then I'll HAVE to change the name and embark on a re-launch anyway.
Rock and a hard place?
Edited by Fallon on Monday 14th April 18:27
Fallon
Fair enough, at least you have considered the viewpoint.
I would still consider my first point, that is to borrow or raise the funds and buy him out now. Between you you should be able to agree a suitable figure for this and you also need to draw up a compromise agreement to ensure that he does nothing in the short/medium term to jepoardise the continuing business of the company (ie trade as asimilar name, set up in competition, etc), this is quite normal, and a good commercial solicitor should be able to draw this up and handle all the bits and pieces for less than £1K. He will have to get the agreement reviewed by a solicitor of his choice (not the same one) towards which 'the company' often makes a contribution (say up to £400).
I have seperated from business partners in the past, we have always agreed the amounts, got the compromise agreement signed up and moved on. It is much better to do this as a single shot rather than having people who have no interest in the business still involved.
If you can't reach agreement about the amount then just walk, you have nothing to loose assuming that there are no tax liabilities, etc. If you don't want to raise the funds then you have to consider:-
1) Is your heart really in this?
2) Or consider converting his shares and backpay to a Preferential Loan with fixed repayment terms - talk to your accountant on this.
In my last split, my partner wanted to take the bsiness in a different direction, I wnated to continue what I was doing, he offered X, I said I wanted Y and we settled on Z (in between X and Y!). I took the view that a clean break was better than dragging it on for a few thousand more.
Since the split, both of us have done well, and have easiliy bettered what we could have achieved as a whole. Sometimes 2 + 2 = 5 and othertimes it can = 3!
You must not get bitter (annoyed) about this situation, he did take less drawings/salary than yourself and has put a loan into the business, these are definitely worth something even if the shares may be worth diddly squat. As I said at the beginning deal with it now and then just move on, it's an opportunity after all!
davidy
Fair enough, at least you have considered the viewpoint.
I would still consider my first point, that is to borrow or raise the funds and buy him out now. Between you you should be able to agree a suitable figure for this and you also need to draw up a compromise agreement to ensure that he does nothing in the short/medium term to jepoardise the continuing business of the company (ie trade as asimilar name, set up in competition, etc), this is quite normal, and a good commercial solicitor should be able to draw this up and handle all the bits and pieces for less than £1K. He will have to get the agreement reviewed by a solicitor of his choice (not the same one) towards which 'the company' often makes a contribution (say up to £400).
I have seperated from business partners in the past, we have always agreed the amounts, got the compromise agreement signed up and moved on. It is much better to do this as a single shot rather than having people who have no interest in the business still involved.
If you can't reach agreement about the amount then just walk, you have nothing to loose assuming that there are no tax liabilities, etc. If you don't want to raise the funds then you have to consider:-
1) Is your heart really in this?
2) Or consider converting his shares and backpay to a Preferential Loan with fixed repayment terms - talk to your accountant on this.
In my last split, my partner wanted to take the bsiness in a different direction, I wnated to continue what I was doing, he offered X, I said I wanted Y and we settled on Z (in between X and Y!). I took the view that a clean break was better than dragging it on for a few thousand more.
Since the split, both of us have done well, and have easiliy bettered what we could have achieved as a whole. Sometimes 2 + 2 = 5 and othertimes it can = 3!
You must not get bitter (annoyed) about this situation, he did take less drawings/salary than yourself and has put a loan into the business, these are definitely worth something even if the shares may be worth diddly squat. As I said at the beginning deal with it now and then just move on, it's an opportunity after all!
davidy
Depending on how mercenary you feel you could play hardball.
Unless you get something in writing which is watertight, he could not only change his mind in a years time, but also as you say be entitled to profits.
Basically, you will be working full time to not only pay back his investment, but also pay his dividend too, whilst he walks away making a second income full time!
How much in comparison do you have invested? The elephant in the room is that if the day after he decides to leave you working as per his plan, what would happen if you wound up the company? He might get little of his investment back, and certainly no dividend...
Could you start up as a new limited co and poach your clients and employees? Is this prohibited in your partnership agreement? Secondly, even if it is, has his ending the agreement voided this?
Unless you get something in writing which is watertight, he could not only change his mind in a years time, but also as you say be entitled to profits.
Basically, you will be working full time to not only pay back his investment, but also pay his dividend too, whilst he walks away making a second income full time!
How much in comparison do you have invested? The elephant in the room is that if the day after he decides to leave you working as per his plan, what would happen if you wound up the company? He might get little of his investment back, and certainly no dividend...
Could you start up as a new limited co and poach your clients and employees? Is this prohibited in your partnership agreement? Secondly, even if it is, has his ending the agreement voided this?
In a way, I'd have thought you are holding a few cards here to be honest.
If the company just folds he will lose his investment and get nothing like the return he wants or expects.
Therefore I'd expect that there may be scope for you agreeing to pay him a proportion of the amount he wants in full+final settlement - it may be easier to raise this now and pay him off than slog it out - but if you do that I'd certainly expect to give him quite a bit less than the 100% he wants.
I don't know what sort of sum you are dealing with here though, as if its like 5K then pride may mean he'd be happy to take that on the chin to spite you and fold it up, but if it's like 100K then I think you can pretty much dictate terms YOU are happy with, and if you cant find an agreement just go it alone.
All IMO
If the company just folds he will lose his investment and get nothing like the return he wants or expects.
Therefore I'd expect that there may be scope for you agreeing to pay him a proportion of the amount he wants in full+final settlement - it may be easier to raise this now and pay him off than slog it out - but if you do that I'd certainly expect to give him quite a bit less than the 100% he wants.
I don't know what sort of sum you are dealing with here though, as if its like 5K then pride may mean he'd be happy to take that on the chin to spite you and fold it up, but if it's like 100K then I think you can pretty much dictate terms YOU are happy with, and if you cant find an agreement just go it alone.
All IMO
I would have thought from P's point of view that they would be better with debt rather than equity as without you working then the equity is worthless whereas debt is debt and there would be a claim against the company assets for it. Alternatively you could convert the equity to a different class of share with no dividend or voting rights to be converted to cash at a set point.
Or not. All about negotiation and your morals really.
Or not. All about negotiation and your morals really.
Thanks guys - all your comments are really thought provoking and have given me a lot to mull over.
I don't honestly believe he will do anything to spite me, but better safe than sorry.
We're meeting tomorrow to thrash out a solution and, from there, will have the solicitor draw up our agreement.
Thanks again, your input is really appreciated.
I don't honestly believe he will do anything to spite me, but better safe than sorry.
We're meeting tomorrow to thrash out a solution and, from there, will have the solicitor draw up our agreement.
Thanks again, your input is really appreciated.
Gassing Station | Business | Top of Page | What's New | My Stuff