Help! New Business Partner Wants Out!

[melaniehewins]

I have been the sole proprietor of my business for three and a half years. I started it on my own, with my own business loans. I love what I do, even though I am not making a huge profit.

Several months ago my husband took a new job in another state so I either had to sell my business or create some kind of partnership as I was still in debt and tied to a 5 year lease. Two "friends" jumped on board and we divided the business into a three way partnership--I kept 30% and they each own 35%. This was October 10. By the end of October, one partner wanted out. Immediately. We let her know it was not an option--I just got out of debt and I was not about to go back into it plus I am moving! My other partner doesn't have the cash to buy her out nor would she want to.

We convinced the "bail-out" girl to stick it out through our busy holiday season, but she just isn't making it easy. Doesn't show up at the business, hasn't done her portion of the work. My partner cornered her today and forced her into a decision because we're tired of the games. Anyway, she thinks she gets 100% of her cash back. Again, we don't have it. I paid my debt with their investment and invested the rest right back into the business.

I don't know what to do! We chose the slowest attorney on the planet and he's been "working" on our partnership agreement since October 10. She is on the bank account, has a debit card, and has been doing our paperwork. I might mention that before she bought in, she was my accountant for three years--she knew the business finances better than I did! What are our options?

[torka]

You need to talk with a lawyer.

If the attorney you chose is moving too slowly, cut him loose and find someone else who shares your sense of urgency. There's no reason for a simple partnership agreement to take two months to draft.

The tricky part is that you apparently have a partner trying to leave the partnership before you have a final written partnership agreement. The partnership agreement (which should be agreed-to and signed by all partners) should -- among other things -- spell out the circumstances under which the partnership can be dissolved and the division of assets and liabilities in the event of dissolution.

But without that written agreement, you're left with an oral agreement based on whatever y'all discussed when forming the partnership. And if you never explicitly discussed how to handle things in the event of dissolution of the partnership, you're facing a potentially tricky situation... which is why you really, really need to talk with an attorney.

--Torka

[David Jackson]

Wow...what a mess! If you guys can't sit down and work this thing out like adults, an attorney may be your only option - yet another expense you can't afford.

Either way, this probably isn't going to turn out good.

David Jackson

[Dave Capra]

You are in a tough spot Melanie. A friend of mine went thru the same thing with her business partner who happened to be her sister. Talk about a lot of hard feelings. Ultimately she had to buy her out.

I personally have signed many independent contractors agreements and in these agreements there is a "get out" clause. Many business people understand that agreements may have to be disolved and include safeguards for both parties in the original contract.

Can you try getting someone to buy her share? If she wants out so badly and your business is doing well there must be another potential partner out there.

Of course, make sure everything is in writing.

Good luck.

[Mr Bill]

There are so many issues here that professional advice is the only way to go.

When you divided up the company, you made yourself a minority partner. So the other two partners could take your business away from you and there's nothing you can do. When the disgruntled partner is finally gone, what is the ownership going to look like? Please don't say 50/50.

If you don't have a signed partnership agreement, then generally there are state statutes that take over and stipulate how the partners are to relate to one another and how one partner may leave. Generally, the departing partner may not make any demands for a buy-out. You may be able to dissolve that person's management rights and authority, but be required to retain her as an equity partner.

Buying a partner out can be tricky as well. What is the value of the company? How did you determine the value when you took in partners and has that value changed?

Unfortunately, people think that attorneys aren't needed when things are going well but that is when they should be used the most. That is the time when the parties can rationally discuss how to handle what happens if things should go bad. If your partner isn't willing to walk away quietly, you're options are all likely to cost you money. You will have to decide if it's better just to pay her off and get her out, or to pay an attorney, then pay her off to get her out.

Then, by all means, get a partnership agreement established with the remaining partner and don't let this happen again.

[Allectus]

I am not surprised that your attorney has not presented a contract.

Rule number one: and this goes for everyone.
Just because someone has a degree and says that do this do that, doesn't mean they actually do what they say.

Case in point. Being that your attorney has not finalized the contract and no one has signed an agreement identifying stipulations of the contract, you are kind of at a loss here.

Your partners can just walk away relative to any verbal agreements you may have made with them/her.

No, I am not an attorney but I am someone who has had tremendous experience in correcting what attorneys and CPAs do to small business. Really I have.

I have the client base to prove it.

Basically, contracts can be written by anyone. Our idea of having an attorney look over our contracts is somewhat of a wives tail.

The essence of a contract, verbal or written can conform to the writer's or reader's linking.

In essence, a contract is binding if it has 3 elements:
1) Offer
2) Acceptance of that offer
3) Service/Action

In this case (if I read it correctly), your attorney has not submitted anything to sign, so my question is...what's the big deal? Give the woman her money back as if it never happened. BECAUSE, according to your contract and what I just wrote, it never happened.

Caveat: She can still sue you for her money back based on the fact that your attorney never had her sign anything and she can claim something of a verbal agreement. If she does this...you lose.

Good luck,

Let me know how this turns out.