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Business Partnership question
Old 06-12-2018, 03:25 PM   #1
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Business Partnership question

I thought many of you on here might have been in a business partnership and this can have a large impact on when you can FIRE. There are 2 partners in my service business (S-Corp). We both founded the company in 2004. It has been very profitable every year and we both still work here. We take little salary and variable distributions each month.

I want to FIRE, my partner financially can't. He doesn't want to buy me out.
So what do I do?
Can I sell it to a random person?
If I walk away do I still get paid out distributions?
I feel like my only choice now is to walk away from it.
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Old 06-12-2018, 04:12 PM   #2
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I would strongly suggest that you consult with a CPA regarding your questions rather than an internet board. The answer would depend on your agreement with your co-owner, if there is any equity in the firm, etc.
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Old 06-12-2018, 04:17 PM   #3
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For sure I will consult with a CPA, but I thought there would be people on here that had a plumbing or construction company, with a partner, and had to deal with this. Perhaps they have advice.
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Old 06-12-2018, 04:27 PM   #4
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I suspect since you are an S-Corp that you own 50% of the stock and your partner owns the other 50%. Do you have any sort of partnership agreement outlining roles and responsibilities, compensation, sharing of profits, etc? If so, then that would be relevant.

I think you need to talk with a lawyer rather than a CPA (I'm a retired CPA).

While it would be ideal for you and your partner to work something out, you may also be able to sell your S-Corp shares to someone unless your corporate organization documents have specific restrictions or provisions on the sale of shares. You also may be entitled to 50% of profits even if you aren't involved depending on what your corporate documents say.

You might work out something where he buys you out over time.... which would be better than just walking away.
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Old 06-12-2018, 05:12 PM   #5
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Yes, I think our corporate attorney would be best. We don't have any special agreements so hopefully there will be a path for me.
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Old 06-12-2018, 05:22 PM   #6
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As a construction business owner this is why I don't do partnerships. Done it a couple times. No more. Although the splits were amicable.

Do your Corp documents have a buy/sell agreement? Doesn't sound like it. Would the business fold or contract a bunch if you stop working in it? You may have some leverage over your partner in that case. You can say i really need out. I can sell to you or an outsider. Or I can just walk away. He's in a tight spot in that case.

Offer a payment plan. Maybe collect your half of profits over a period of time. Can he replace you? How much would that cost? Are you intergal to the business? Are you tied to certain customers? Do they always call you? Or do you do the operations? How long would it take to train someone up? And how much would that cost to hire someone?

You probably have to be a bit more forceful in telling him you want out
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Old 06-12-2018, 05:57 PM   #7
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I think you are right. I think the business would likely fold within 12-18 months if I left. I don't think there is any buy/sell agreement. I need to make him an offer he can't refuse and cut the deal so there is a personal guarantee.
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Old 06-12-2018, 06:07 PM   #8
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If you walk you get nothing. If you both sold you would get what the business is worth without the both of you... essentially the value of your customer relationships and the value of tangible assets.

A fair price for your half might be 1/2 of the value of tangible assets and customer relationships... and then devise a payment that is affordable for the business... knowing that something is better than nothing.
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Old 06-12-2018, 06:13 PM   #9
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Yes, in the end you'll need to work with a lawyer.

Yes, you can sell it to a random person if you can find one dumb enough to buy himself a probable adversary.

Yes, you should have had a buy/sell agreement. I always press my SCORE mentoring clients on this because it is much easier to discuss and agree in the beginning. Another aspect is death or divorce of a partner, where the partner's share is suddenly wholly or partially in the hands of someone who cannot contribute to the business and who wants an immediate sale/cash out.

OK, that said, I would start with your partner. Make it clear, gently, that you will be "out" one way or another. Make this a shared problem. Worst case you can probably go to court and force a sale. Best case, maybe, is that he takes over the business and buys you out with an SBA loan. I have seen this done. Middle case, maybe, is your equity is converted to debt and the corporation pays you off over a period of years. Ideally with the loan personally guaranteed by your partner.

But the key is for him to understand that this is a problem that you both own and need to solve together, amicably and creatively. Do not think in terms of "leverage." No one will be having any fun if the situation turns adversarial. No one. If your lawyer has the type of personality that will serve well as a trusted facilitator this might help. If not and you feel you need help, look for such a person.
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Business Partnership question
Old 06-12-2018, 06:29 PM   #10
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Business Partnership question

Quote:
Originally Posted by Shabby View Post
I thought many of you on here might have been in a business partnership and this can have a large impact on when you can FIRE. There are 2 partners in my service business (S-Corp). We both founded the company in 2004. It has been very profitable every year and we both still work here. We take little salary and variable distributions each month.



I want to FIRE, my partner financially can't. He doesn't want to buy me out.

So what do I do?

Can I sell it to a random person?

If I walk away do I still get paid out distributions?

I feel like my only choice now is to walk away from it.


If I were you, I would announce my retirement at x days out and try to work out a deal with your partner where you continue to get a distribution after retirement. After all, you are part owner until you sell your share of the s-corp. Perhaps he can begin purchasing your shares from his future distributions.

You should have a buy-sell agreement that spells out if/how shares can be sold to a third party. But I see that you donít think you have one.

If you continue to own shares of the company, you will continue to get K-1ís for shares that you own. So you better get distributions in order to pay the tax from the K-1. You need to sell your shares down to 0% before you will be exempt from tax on the company income.

Contact a good business lawyer for some advice.
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Old 06-12-2018, 06:54 PM   #11
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It is very important to have a really good agreement any time there are numerous owners. And It takes a really good attorney experienced in such matters. It is too easy to have one partner's personal life affect the business and the other partner(s) business interest. Your partner's spouse can be your worst enemy if they get a divorce. And if your partner dies, I hope you have sufficient life insurance in order to buyout the surviving spouse and/or children. You may can not get along with new partners that bring nothing into the partnership.

Remember that every business has a lifespan. It is really best to have a date where one partner can purchase the other's interest. These matters are just not to be taken lightly.
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Old 06-12-2018, 07:20 PM   #12
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I was in the exact same situation.
#1 shame on you for not having these terms described at the beginning. Lesson for anyone else considering a similar arrangement. Think about the end at the beginning.
#2 Do you have any key employees to do an ESOP with?
#3 if no and the partner says no, then I would look for a buyer for both your shares.
#4 if 3 is not possible, are their children that would want to take over?
#5 if no to 2 and 4, I think you need to hire someone to take on your role and get some sort of payment or commission based on sales, but good luck finding your replacement.
Not to sound harsh, but the mistake was made at the beginning, not now.
I was fortunate to be able to sell to 2 key employees.
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Old 06-12-2018, 07:23 PM   #13
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Yes, I think our corporate attorney would be best. We don't have any special agreements so hopefully there will be a path for me.
Probably your own corporate attorney would be better as any attorney who has represented both of you would probably be conflicted out. Whoever you talk to a corporate or transactional business attorney is who you need.
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Old 06-13-2018, 09:32 AM   #14
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I was fortunate to be able to sell to 2 key employees.
This seems like a realistic possibility, but I would prefer to sell to the company and make it a priority for my partner to keep things going. And yes, in retrospect the exit strategy would have been great to detail in 2004. Also, I would have bought the building back then instead of renting.
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Old 06-13-2018, 09:33 AM   #15
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Yes, in the end you'll need to work with a lawyer.

Yes, you can sell it to a random person if you can find one dumb enough to buy himself a probable adversary.

Yes, you should have had a buy/sell agreement. I always press my SCORE mentoring clients on this because it is much easier to discuss and agree in the beginning. Another aspect is death or divorce of a partner, where the partner's share is suddenly wholly or partially in the hands of someone who cannot contribute to the business and who wants an immediate sale/cash out.

OK, that said, I would start with your partner. Make it clear, gently, that you will be "out" one way or another. Make this a shared problem. Worst case you can probably go to court and force a sale. Best case, maybe, is that he takes over the business and buys you out with an SBA loan. I have seen this done. Middle case, maybe, is your equity is converted to debt and the corporation pays you off over a period of years. Ideally with the loan personally guaranteed by your partner.

But the key is for him to understand that this is a problem that you both own and need to solve together, amicably and creatively. Do not think in terms of "leverage." No one will be having any fun if the situation turns adversarial. No one. If your lawyer has the type of personality that will serve well as a trusted facilitator this might help. If not and you feel you need help, look for such a person.
Amazing advice. I really appreciate you taking the time.
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Old 06-13-2018, 09:51 AM   #16
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This seems like a realistic possibility, but I would prefer to sell to the company and make it a priority for my partner to keep things going. And yes, in retrospect the exit strategy would have been great to detail in 2004. Also, I would have bought the building back then instead of renting.
Are you my twin? Sounds like similar situations. We bought the building. If you can pull it off, it is a great way to have the business "buy" your equity in the building vs paying someone else for the space.
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