Buying Out A 50-50 Partner, Fairly and Easily.
Most frequently, partners in a small business are very close friends, family, or long term trusted sweat equity business relationships.
Perhaps one of the most difficult challenges confronting this relationship is how to break it up when the time is right. There are always many emotional issues which I can not work out for you, but the equalizer is found in how a buy out is accomplished and most important what the price and terms are. If its fair the relationship and the business have a chance of surviving. if it is not fair, more then likely it will either not occur at all or the relationship will end, with a long term very negative air, a huge personal loss as well a strong likelihood the business will either suffer or cease to operate.
Here is a way to resolve this difficult transition, safely and respectfully for both partners in a buy out situation.
Partnerships break up for many reasons. Some personal, some financial, some ego driven. When this happens there are two important goals which must be achieved:
1. preservation of the business
2. preservation of the relationship
There is only one way to accomplish this:
With a fair deal for both sides. If adequate consideration is paid, and the process was not injurious to the players, and if the terms of the payoff are agreeable to both sides, then everyone will survive even if there are a few ruffled feathers.
The devastation and destruction which so frequently is associated with partnership break ups can be overcome, if a buy out plan is established in the beginning of the relationship. If everyone agrees on it at the onset When a breakup occurs and the plan must be utilized everyone will remember they already agreed to this process, it was fair when they agreed so it must be fair now, and disagreement is less likely to occur.
Thus I have a strategy that either partner can invoke, knowing the potential consequences, thus it is only utilized if the partner is truly ready.
Here is the deal, simple, honest and fun…everyone wins, but know one knows who will be the surviving partner until the strategy is played out.
First, it is important that both partners have a full grasp of the numbers: the asset value, the good will value, accounts receivable, account payable an income statement and a balance sheet.
Then the partner wanting to get rid of the other partner and buy him/her out makes an offer. The offer had best be as high as reasonable because if the opposing partner chooses, he/she can turn around and using that number offered to him/her, can opt to buy out the original offering partner for that price he/she offered.
The original offering partner can up the ante and offer more, but the game is over and the second partner the one who was first offered too and now exercised his option and made a turn around offer with the same number which is now binding on the original offering partner may at his/her choice either accept the new counter offer or demand the first offering partner accept his turned around counter offer at the original price offered and be bought out.
This process creates equality, is respectful and assures fair value for the partner being bought out, whichever one it may be.
In addition at the beginning when this plan is agreed to, the terms of the deal are also agreed to and since no one ever has cash, and to make certain the two partners can both implement the buy out, the agreement further states that the bought out partner will accept a note for five years at 8% interest payable monthly.
This works. The offering price by the first partner is high as the offering partner knows if its too low the other will buy him out for the same price. If its high enough the other partner may accept it, either way its respectable, affordable and a win for both. The business and the relationship can be spared destruction which so usually occurs.
If you have a 50-50 relationship and have not considered exit strategies for an individual partner, add this strategy at your next board meeting, its not to late.
I have seen it work and its a beautiful thing. Call for help 866-600-9080.
I appreciate the information you’ve offered but was wondering if the company has just started and there is loans not in the partners name. How do I make sure the loans are on the business and not me anymore.
Its probably too late for that, but you can have the business and or your partner agree to imdemnify you and back you for a share of the note spreading the risk between the partners, but its probably too late to redraft it in the name of the business, unlikely.
Hi Donald, I am deciding on starting a general construction company in New York City with a friend as a partner. I heard alot about the 50/50 split. Looks like its best that one partner has a larger percentage lets say 51% and 49%. The question is which one of us will have 51% or 49% ? How do we decide? What do you suggest ? What if we decide to go with a 50/50 split ?
Thanks very much for your knowlegde and for this great info!
Thats easy, do not do a 50-50% split, no matter who has the extra point it is important that the two of you decide who will have the last word.
It is impossible for me to decide for you, as I do not have the appropriate info, but one of you must be the lead man, or the money investor, the majority tends to follow the cash invested but if that is equal there must be some advantage one of you brings to the partnership that should warrant final decision making authority…if not then flip a coint but ther winer has won big, final word, the tie breaker.
Don
thanks for your help Don. So lets say we go with a 51% and 49%, can we still have a 50-50 money split on earnings? or it doesn`t work that way ? I am searching for a lawyer in New York to help us set up the partnership agreement, any idea or suggestions ?
thanks again for the help!
james
Yes, organize as an LLC and you can split profits and ownershiop any way you choose…Cannot recommend a lawyer in Manhattan, do not know one.
don
I am in a 50/50 partnership with someone I went into business with 4 years ago. We were friends and nothing formal was ever written up. The business is fairly successful, but my business partner has been for the past couple of years very lazy and contibutes nothing towards the business. I would like to continue the business without him, but what if he refuses to sell his share?? Or even worse… sells his share to someone else??
you have a problem, but if you offer him a reasonable buy out price and schedule it over time so it can be paid it should work out. In the courts the judge will ordr a liquidation of the assets which will rob you both of any value although you could buy the business for cheap at that time if he forces you too, perhqps a little reality talk will help he has no choice one of you has to survive one of you has to go…call me if you want help.
don 413-687=8388
i have a 50/50 partnership, no partnership agreement was signed. He does majority of sales and I do majority of administrative. He feels he does most sales and is “entitled”. We are both unhappy with patnership. I want him to buy me out of company. Is it fair to ask for initial start up cost and 2 yrs compensation of all work put in to develop system for running company? If he does not agree, can I request the dissolution of company and he start fresh?
Hi i stumbled across this page while i was looking up “partnership profit loss”
basically i am in a partnership with my aunt 50-50. and i want her to buy me out. we’ve already made a contract that she will pay me 75,000. at the beginning of the company we both put in 95000 each which was 4 months ago. we had a cpa calculate profits and losses, it was loss for 30000. now she wants to take 15 thousand from my 75, and she is only going to pay me 60,000 is this right ??? or is she over her head. shouldn’t the loss be taken from the 95? that i initially put in? please help, my mom she is stressing over this and my aunt said to me “i’ll see you court” since i wouldn’t give her a bill of sale because i did not agree with her deducting from the 75000.
Hi… Iam in an PA with 2 of my partners… a private physician group… my contracts says I will be eligible for partnership once I get my green card approved and this did happen. I was told verbally that no buy in 2 years ago and I’ve been treated like a partner with the bonuses. My question is Iam about to leave my group to go back to school/ education and am I entitled to the equity in our office that includes expensive equipment or not ? 80% of the loan I believe on it has been paid ( and I contributed to that)
We partnered up with another couple to start our business which is launching a new product with an unknown market (nothing like it really exists). My husband and I created the product and brought the other couple in. From a time perspective, they have done essentially nothing, financially they have contributed 50% (which is only about $2k). The Ficticious Business Name was filed just over 90 days ago. We filed it as a General Partnership (with the 2 husbands on it), but never created a Partnership Agreement. They agree that they haven’t contributed their time and state that the cannot. At this point, the company is still operating at a loss. What is fair for a buyout – their $2k investment, their $2k investment plus interest, their $2k investment plus 50% of the profit on sales (which is still a loss, in total but with what we’ve sold, could be another few hundred dollars), or ??? How do we cover ourselves so that they don’t try to come back for more down the road given that their name is on the Design Patent Application (though they had no part in the design)?
Lena,I am quite certain that with an opportunity to receive back the money invested your ‘partners’ would gladly sign a release that returns all ownership and benefits from now until the future in exchange for your giving them back their cash and and removing any future potential liability by holding them harmless from such possible events.this will work just fine. $2000. now and thats it. Don
They should fall all over themselves to sign that and receive a check back. In addition they must also agree in the same document to transfer all rights on the patent to you…
My partner and I have been in business 4 years, we’ve never made a huge profit. My partner is ready to move for reasonable reasons. We have a 50/50 equity split. I want to continue the store. We each put in the same initial capital, and we still have Bank debt. We’re able to meet all our obligations, but how does having more debt than assets effect a buy out? How do we treat his initial capital, is that just a loss he takes from taking the risk of starting a company? Thanks, Chris
The additional question is does the business make a profit. It appears it does not and thus the business is only worth the value of the assets in liquidation. ne approach would be for you to take full responsibility for the debt and release your friend to go his separate way. His investment is gone, his debt is gone and he is free to go. That works.
As an Example Let’s say Ben & Josh are partners in a restauarant. Ben brings in Management experience but no capital and lets say Josh brings capital how does profit and loss equal out and where does the loss get recorded? I know that most business loose money in the first or two years.
losses should go to the money investor, profits should be split between you but could favor the money man by either returning his cash first before their is a split, or a disproportionate split honoring the money man. As you can tell, I believe sweat equity while valuable and should be rewarded stands behind money investment.
We spoke on the phone about our interest in your advice. I sent you an email last week but have not heard from you. Could it be that I did not copy the email correctly?
Please send us your contact information to: japarjus@bellsouth.net
Looking forward to your contact.
Sincerely,
J.A. Parjus
I got an idea…and thinking to start a business…i know it is not possible to do it alone…so i ask 4 friends and told them my ideas..they agree and we started…the problem now is, about the agreement…
the question is, If one day one of them required to break partnership, should we use the money earned divide into 5, and give him back the 1?
Sen, It is a bit more complicated. Is the business making a profit? If so his share is worth more then his i/5th. Did he put money in, this complicates it. He will need to get his money back if the business is making a profit and then a piece of the increased value… Did anyone else put money in? Again diminishing his return if he only put sweat equity into it. Is there any debt? this may have to be considered in his buy out…I would need far more information, but all these issues are important in determining the buyout of a partner.
Hi Donild, I have a 5050 partnership with a friend.We owen a business and it is a corporation. the co. name and membership is servies marked. The co. has made money from day one.We have never had a money issue,but she has started dating a guy that i know is very bad for our business. there have been some red flags going up all ready.I think there is some drug use involved here with him. the guy just got out of prison. I know her personal life has nothing to do with me. But how can we spilt this business up, I don’t have the money to buy her out,and she do not have the money to buy me out.I have tryed to talk to her about this,and she knows he’s doing durgs.How can i get out and keep some of my bus. What can i do?
Charles,
Why not buy her out with a note, come to an agreement about amount and then structure a payback over time. or vice versa…she can buy you out.
thats about the only way i can suggest an equitable resolution…seems a bit harsh, as you are correct her personal life should have nothing tio do with the business, hard to see how he effects your businesss but that is your decision.
Don
My sister and I started a insurance business. She is wanting to bring another partner in or do a complete buyout. I do not wish to continue in either situation. How do I go about figuring my buyout amount? We have a 350,000 premium base. Some are more than 10% commission. There is a debt of about 33,000. Do I figure half of the debt as my part from the profit? Not sure what to ask for in my buyout portion of the business or if it progresses into a partnership. Can you give me some pointers on how to figure what I should ask for?
I have an s-corp with a partner 50/50 split. We do not have a partnership agreement. I found out after incorporating that she has a religious restriction that has somewhat effected our business. On top of that, she brings ZERO to the table. Hindsight is 20/20. If she won’t let me buy her out, can we dissolve the business, split the equipment, clients and employees and go our seperate way?
I was a homemaker and got talked into starting a business – 2 kids activity schools – by my friend, as a 50/50 partnership. She has the teaching expertise and I was involved in providing the administrative assistance besides 50% of the financing. Now our relationship has soured, and she routinely is critical about everything I do, to the extent of humiliating me in front of our staff. I want to simply end the business relationship and cut my losses, but as the entity is yet to turn profitable she refuses to let me walk away. We have each put in 50K in the business and we owe another 50K to the bank, besides 20K in rent liability. Our enrolment results in us falling a few hundred $ short of break even. She is agreeable to us splitting the 2 studios but I have no technical expertise in running one independently. Please advise. Is there legal help I can seek? I have little experience with this sort of thing.
hi Donald,
a friend came out with an idea for a business for both of us as part time job for the beginning, we can not afford to quite our jobs right now.
it was a very interesting idea, i was was impressed with all the details she gave me, so i did my homework ( my resersh & “first business plan”).
i found a related franchise to buy, i discuted with her…
all the above took us around 3 month…
because she doesn’t have time ( work & Family with 2 kids)
i also have my schedule but i can make time for our business, i am already doing what i have to do ….
but it seems it will not work out with her she is not making the effort to find time…
now my problem is how to tell her that i want to go on with the business but not with her as a partner but with someone else ( because i can not wait for her anymore time is flying… & at the same time i can not afford the franchise cost alone i need a partner) taking into consideration that at the beginning it was her idea.
i will appreciate if you can help me
i am felling so guilty now even before telling her that i have to move on with the idea
thanks
Hiba,
This is an easy one for me, as I am not emotionally attached to your plan or your friend. Its simple, it is inconceivable that she can be a partner as it is quite apparent she cannot invest the time required. Thus unless she is prepared to make a major change in her life and commit to full time effort, you will have to seek out a new partner…Thats it, there is no more, lose the emotional feelings, its business. No harm intended and she can join you if she chooses but without a real time commitment it will not work.
Don
do it.
I am in a 50/50 partnership agreement in a corporation. My partner has filed personal bankrupcy and moved out of state. How do I make decisions, run the company and basically keep in in a forward moving direction since his trustee has control of his shares. I have been tring to buy out as per our buy laws, hasn’t worked yet. Do I dissolve the company and how do I maintain the majority of Assets, trademark information, marketing, things like that. So then I could start a new company on my own with the informaion.
Don,
A friend and former vendor told me of an idea and I told him that sounded good. 3 months after that, I decided to accept a retirement offer from my employer and contacted my friend to see if he was still interested on putting that idea in to a business model. He said yes and we started working on it for 5 months until we noticed we needed help so we inducted 2 more people at which an NDA was signed and use my friend’s company name instead of getting a new company entity.
My friend changed against me making me feel useless by attacking at everything I said or did which it was stressing me out and unproductible as I fear from rejections if I were to say/do anything. So, 3 months into a 4-way partnership, it appeared they wanted me out (so did I) and at our last meeting I asked all 3 of them if they wanted me out- 2 said maybe there’s something I can do to contribute and my friend- indirectly, avoiding to a clear answer asked me what tasks I wanted to do? I left the meeting still as partners but I knew they’d discuss my fate behind my back- and they did. I received a call from my friend next day and he said the business wasn’t for me and I told him I was not confortable working with them anymore and that I wanted to leave. So, I told him that if I would get my signed NDA back- we will all go our separate ways and he said he would but and asked for a company product kit back. What I received from him was a copy (which I’m still bound for confidentiality) and a letter stating our mutual agreement about been relief from the company.
Now, the company has not made any money but only expenses. However, it has a potential of making BIG money. What is my legal term here- should he had bought me out with IOU or not much to go on since the company is not making money at this time.
Thank you,
Louis
Hi Donald!
I am running a recruitment agency for 7yrs now and I hold 10% shares of the corp. My brother who holds 50% shares died last year and all of his shares by virtue of extrajudicial settlement was transferred to his wife. The wife is trying to put her weight on me though she is not participating in the operations of the company. And even our relationship is strained to the max! I want to buy her out so the corporation can have a peace of mind and I can get on in running the company without further ado. I do hope the widow of my brother will agree and be amenable in buying her out..
Hi, I took on a partner 6 months ago, they invested a relatively small amount into it as I was in a financial crunch (very stupid move I now realize). After this time together they have done absolutely nothing in terms of the running of the business and are not bringing in any sales.
After discussing devolving the partnership with my lawyer he said that the original investment should be paid back minus salaries during this time. He also said that they were liable for half of the running costs during this time but my partner wont budge on the fact that they want there full investment back as well as a 50% share of the profits during this time.
What can I do as I am going to loose my business if it comes to this.
The topic seems thorough; I just wish it detailed more of what to do when a partner just won’t agree. It seems like a common practice and one I’m faced with as of recent. Rather, I refer to her as my “partner”, but legally we are both just shareholders as we own a C corp. Only two months in (before any bylaws, resolutions or articles of incorporation have even been filed) I have decided this just doesn’t work for me because, simply put- she doesn’t work… at all. Everything is left up to me. Additionally, her job was going to be based largely in keeping our books and since going into business, I’ve found out she doesn’t manage her own finances very well (behind on all bills including mortgage, paying utilities with credit cards when income is in the six figures). She was my best friend. I’m not torn up about the loss of the friendship, because her behavior assures me daily I’ve made the right decision. She’s been juvenile, spiteful and incooperative since day one. She finally agreed that I could buy her out for the same price that she invested in the startup (since we have no equity, profits, property, etc) and once I drafted the Buy-Sell Agreement(the very next day), she’s been MIA. No response to emails, texts, but I see she has been online and checked her Facebook, etc. I can’t seem to get a straight answer from anyone as to what action I take when she is just avoiding me. My career is at a standstill and I don’t think I can afford an attorney and going to court over this on top of buying her out. I’m lost.
This is a classic issue, happens all the time and it is a problem for sure. If you are willing to buy her out, draft a letter stating this, enclose a check for half the amount, indicate on the check and in the letter that accepting this check is consideration for the purchase of her stock. Indicate further that the remainder due her will be available upon her singing various documents and returning the stock certificates if they were ever distributed. Then have a corporate meeting and remove her from her position , the bank accounts etc. You can do this with less then half, any amount which will create a transaction to occur.
If this dopes not work, shut the corp down, purchase the assets for liquidated value, a lower umber then her buy in, as really what are the assets worth in liquidation, not much and re-open…. and reincorporate. This is a little rougher and may not be totally “legal” but what is she going to do about it, there is no value to the business at this time.
I have 2 partners in a partnership PLUS they are also equal share holders of a corp that we have agreed upon in numbers & terms for me to buyout.
The bank has agreed to finace however i need to write a purchase agreement for both Partnership & s Corp and not sure where to begin?
I am with a partner in business and I own 25 % while she owns 75 %. I am the one who is involved in everyday running of business while she only receives her profit share at end of the month. She mentioned last year that she wished to sell of her share to me, but I encouraged her that we move on in partnership as she is the one who established the business and it would be more fair if she continued also benefitting. The down thing is that she is too busy with her government work and doesn’t have the time to even pay a visit at the premises. My goal is prospering businesswise and I see her as a hindrance. So , I would like to invoke a buyout of her 75% share so that I fully own the business. I would like to propose to her that I would like to buy her share at 420,000. her share in business can be valued at 200,000 but am offering more to entice her off. I intend to pay her in instalments of 30,000 for 14 months. How do you see this, can it work out well?
Way to high an offer, why would you offer over double her value? and I wonder how you are valuing the business. Get some help here.
First, while fair, it also depends upon what he business is worth, how much it is making and what relationship your investment has to your buy out…the concepts are fair what do the numbers say? Yes you can ask fir a dissolution, but that will be destructive to both of you and will require a costly law suit, no a good idea a all. Work it out, both need to make compromises, disaster fro liquidation should not be an option.
Valuation is always a challenge and is the topic of many discussions. Unfortunately the business is too young to know whether or not the losses will continue or its just part of the start up ramp. However in a classic sense, if the business is losing money the business is only worth the value of the assets, which i am unaware of. if the business is making money then one can experience a multiplier based on the profitability. In this case with only a 4 month track record, who knows were it is going. I also am not sure how the $75,000 buy out was decided upon, as it may be that the $15,000 was already deducted from your buy in of $90,000. thus accounting for it. That would make sense to me, however not knowing how the $75,000 figure was derived this too is conjecture.
My opinion without any knowledge at all, is the business is too new to know what it is worth and since you both put in $90,000 and you want out, after only four months of operation, it seems correct that you deduct the $15,000 from the $90,000 and pay her the $75,000 offered, recognizing the $15,000 , your share of the loss. Makes sense to me . That being said, if the business is a loser, take the 60,000 and run as soon it will be worth less and less, thus while this may be short, it also may be the highest amount you will see. On the other hand if you truly believe the business will become profitable then hang in and wait the turnaround and gain on your investment. My guess is you have lost faith quickly and thus want to cut and run, and if this is the case take the 60,000 and run whether it is the right number or not, it may be the best move for you given the reality of its losses and the down economy we are in.
Further given the aunt relationship, what choice do you have?
My question is why so soon? and depending upon that answer I bet my conclusion would be take what ever you can get and consider yourself fortunate she has the cash to buy you out.
Peace.
No, you are not a partner…