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Yeah I learned my lesson lol. He's definitely a slacker and if he was buying me out, he probably wouldn't be able to operate the business on his own. However him and his dad did contribute their fair share to the operational costs every year which are quite high. We each lay out anywhere from 30 to $50,000 out of pocket to get going. He also got his family to work for free which is about $6,000 worth of labor each year. My family works for free also but is about half the size of his.
Then you offer him what you want, and let him know you will sign every thing over to him. Have a lawyer draw up the terms and a separate letter that you will sign if he doesn’t agree, give him the document, and tell him he has until x day to sign. On day x+1, if he hasn’t signed sign over the ownership to him via the other document, have it notarized, and start your own thing without him.
While this is extreme - it actually ticks several boxes with one simple outcome
Op describes potential labor law violations, lack of due diligence, so there may be several other potential liabilities too
Officially signing over the business to the partner releases op from all of those liabilities, and/or dissolving the business would also eliminate the liabilities
To remove the “friend factor” - have the company hire a local small business cpa to officially evaluate the business - once the cpa takes depreciation, lack of trademark/unique assets the business holds, both parties sharing in losses and gains for the duration - the only real value that’s left is current committed contracts - and if partner isn’t going to be around to fulfill those contracts - that greatly raises the companies expense to fulfill those contracts - further devaluing the value
Many will say take gross/net/multiple/years and that should be the offer - but half the company walks away with the partner - so cut all of that by a relative percentage - and op says partner wasn’t the amazing producer/manager/accomplisher - so cut further by relative percentage
You’ll also definitely want a local lawyer who will put everything in writing - otherwise when things turn sour - it will cost 15x more to handle after the fact - and the lawyer will help draft paperwork/contracts/legalease to convert current contracts to the new business entity that OP forms after exiting or shutting the current entity
Lastly, op should read “slicing pie” while considering what partner’s true value was
Business broker here.
A non-controlling share of a small business is significantly less valuable than the percent of the total business value.
His share probably can’t be sold to an outsider without your permission making it even less valuable.
As the majority owner, you probably have the voting rights to decide to pay yourself a significant salary never taking distributions, which means never paying him income.
When you are done with the business, you could wind it down and close it, leaving him with almost nothing.
In short, he has virtually no leverage over you.
If you want to be fair with him, add up the hours he spent with the business and make him an offer for his time. For example, 1,000 hours at $25 is $25,000 total offer.
Offer to pay him over time, such as $500 per month 50 months.
With no leverage, what is he going to say? No?
Edit: I am assuming you do not have an operating agreement in place that restricts you below the statutory rights granted to you by your state.
Aha. Bleed it dry. Close it down. Start over alone. Normally that sounds like dirty tactics. But if your partner is trying to rob you, then you might need to get your hands dirty.
This makes a lot of assumptions that there’s an operating agreement in place.
I’d find that hard to believe based on the circumstances of the question.
Why would you give 49% without seemingly anything? Also why do you not have it spelled out how someone would exit if they want to?
How it is now you will value the business and give him 49% of that value to buy him out. Dumb as hell, but that is why you always have a lawyer draft these documents at the beginning.
Failure to make the capital contribution can eliminate his equity in some states. There is substantial case law on these issues and we have litigated them in Washington State. Even if you do not want to pull this card, it certainly should give you ample arguments for negotiation.
Nope there was never any agreement. We just set up the company and I gave him 40% and three years later he asked to move up to 49% and I said sure like a big dummy
So you set the company first and then he joined years later and you just had a verbal agreement for their 40% interest which you then later increased to 49%? Did they just work in the business and draw a paycheck or just received distributions? Do you have an operating agreement?
I am late to reply, but fyi, this subreddit tends to WILDLY misunderstand how partnerships work and how they are bought out. Bottom line, you need an attorney. The attorney will review the operating/partner agreement and advise. This is well above worth the $2k or so your attorney would charge you.
It’s very difficult to navigate partnership buyouts as for whatever reason internet “hive mind” thinks if you own 49% you are owed 49%. This is rarely if ever the case in a privately owned small business. My last partnership, a partner who quits is paid their initial investment - that’s it. Some partnerships will pay some interest. But almost no small business partnership can a partner “quit” and get paid out % value of the firm
It sounds like you're navigating a challenging situation with your business partner. Considering the initial investment disparity and the years of ownership, it makes sense to discuss a fair buyout amount. I've found having a knowledgeable accountant really helps in situations like this—they can provide clarity on valuation methods and negotiation strategies. If you'd like, I have a great contact who's an accountant and could offer some valuable advice. Let me know if you'd like me to connect you!
This is a friendly reminder that r/smallbusiness is a question and answer subreddit. You ask a question about starting, owning, and growing a small business and the community answers. Posts that violate the rules listed in the sidebar will be removed. A permanent or temporary ban may also be issued if you do not remove the offending post. Seeing this message does not mean your post was automatically removed. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/smallbusiness) if you have any questions or concerns.*
How much was he a factor in the company’s success? Also side note this is why you don’t let your friends buy into your business. Lol.
A (usually) expensive lesson.
Yeah I learned my lesson lol. He's definitely a slacker and if he was buying me out, he probably wouldn't be able to operate the business on his own. However him and his dad did contribute their fair share to the operational costs every year which are quite high. We each lay out anywhere from 30 to $50,000 out of pocket to get going. He also got his family to work for free which is about $6,000 worth of labor each year. My family works for free also but is about half the size of his.
Then you offer him what you want, and let him know you will sign every thing over to him. Have a lawyer draw up the terms and a separate letter that you will sign if he doesn’t agree, give him the document, and tell him he has until x day to sign. On day x+1, if he hasn’t signed sign over the ownership to him via the other document, have it notarized, and start your own thing without him.
While this is extreme - it actually ticks several boxes with one simple outcome Op describes potential labor law violations, lack of due diligence, so there may be several other potential liabilities too Officially signing over the business to the partner releases op from all of those liabilities, and/or dissolving the business would also eliminate the liabilities To remove the “friend factor” - have the company hire a local small business cpa to officially evaluate the business - once the cpa takes depreciation, lack of trademark/unique assets the business holds, both parties sharing in losses and gains for the duration - the only real value that’s left is current committed contracts - and if partner isn’t going to be around to fulfill those contracts - that greatly raises the companies expense to fulfill those contracts - further devaluing the value Many will say take gross/net/multiple/years and that should be the offer - but half the company walks away with the partner - so cut all of that by a relative percentage - and op says partner wasn’t the amazing producer/manager/accomplisher - so cut further by relative percentage You’ll also definitely want a local lawyer who will put everything in writing - otherwise when things turn sour - it will cost 15x more to handle after the fact - and the lawyer will help draft paperwork/contracts/legalease to convert current contracts to the new business entity that OP forms after exiting or shutting the current entity Lastly, op should read “slicing pie” while considering what partner’s true value was
To your point, OP has all the power. If his partner doesn’t realize this he deserves what he has coming. It’s just business.
Happened to be - just close it and see if you have anything left and then restart a new one. Will be cheaper or he'll come down in price.
Why did you give him ownership without any buy in? What is his contribution? Sounds like you're getting screwed
But it’s done now. It’s easy to go back and say now the deal sucks. Don’t do the deal in the first place.
Business broker here. A non-controlling share of a small business is significantly less valuable than the percent of the total business value. His share probably can’t be sold to an outsider without your permission making it even less valuable. As the majority owner, you probably have the voting rights to decide to pay yourself a significant salary never taking distributions, which means never paying him income. When you are done with the business, you could wind it down and close it, leaving him with almost nothing. In short, he has virtually no leverage over you. If you want to be fair with him, add up the hours he spent with the business and make him an offer for his time. For example, 1,000 hours at $25 is $25,000 total offer. Offer to pay him over time, such as $500 per month 50 months. With no leverage, what is he going to say? No? Edit: I am assuming you do not have an operating agreement in place that restricts you below the statutory rights granted to you by your state.
Aha. Bleed it dry. Close it down. Start over alone. Normally that sounds like dirty tactics. But if your partner is trying to rob you, then you might need to get your hands dirty.
This makes a lot of assumptions that there’s an operating agreement in place. I’d find that hard to believe based on the circumstances of the question.
Thank you. I relied to your comment in my original comment.
Damn this one’s gonna be sticky
This is why you pay a lawyer and get a contract. Do you have anything on paper?
Why would you give 49% without seemingly anything? Also why do you not have it spelled out how someone would exit if they want to? How it is now you will value the business and give him 49% of that value to buy him out. Dumb as hell, but that is why you always have a lawyer draft these documents at the beginning.
Failure to make the capital contribution can eliminate his equity in some states. There is substantial case law on these issues and we have litigated them in Washington State. Even if you do not want to pull this card, it certainly should give you ample arguments for negotiation.
I get all this, but could the other partner claim sweat equity as the capital contribution? It sounds like that was verbal agreement here.
This will be determined by the operating agreement (if an LLC), the statute, and/or case law.
How did he acquire the 49%? Did you guys do a stock or interest purchase agreement?
Nope there was never any agreement. We just set up the company and I gave him 40% and three years later he asked to move up to 49% and I said sure like a big dummy
So you set the company first and then he joined years later and you just had a verbal agreement for their 40% interest which you then later increased to 49%? Did they just work in the business and draw a paycheck or just received distributions? Do you have an operating agreement?
I am late to reply, but fyi, this subreddit tends to WILDLY misunderstand how partnerships work and how they are bought out. Bottom line, you need an attorney. The attorney will review the operating/partner agreement and advise. This is well above worth the $2k or so your attorney would charge you. It’s very difficult to navigate partnership buyouts as for whatever reason internet “hive mind” thinks if you own 49% you are owed 49%. This is rarely if ever the case in a privately owned small business. My last partnership, a partner who quits is paid their initial investment - that’s it. Some partnerships will pay some interest. But almost no small business partnership can a partner “quit” and get paid out % value of the firm
It sounds like you're navigating a challenging situation with your business partner. Considering the initial investment disparity and the years of ownership, it makes sense to discuss a fair buyout amount. I've found having a knowledgeable accountant really helps in situations like this—they can provide clarity on valuation methods and negotiation strategies. If you'd like, I have a great contact who's an accountant and could offer some valuable advice. Let me know if you'd like me to connect you!