How would somebody get out of a business partnership?

Question

Someone close to me had a business up and running but lacked motivation. He then went into partnership with someone who was keen to make the business go places.

The business was already established, it didn't have any premises, but had all the machinery. The new partner put no money into the business, but did bring in alot of work and together they found some premises. The same partner started slacking. All he did was sell the occassional lead that came in from the newspaper. He caused alot of animosity among the employees, and speaks to them like s&*^. The employees will all go with the original partner as it's family. But... aparently, it would cost so much money to buy the new partner out, that the other feels trapped.

I won't bore you with loads of details, but the new partner isn't pulling his weight, yet shares the profits 2 ways with the original owner. Is there a way out?

Answer 1

What does the Partnership Agreement say ?

I would suggest the first step is for the 2 of them to sit down and discuss the problem.

Essentially both have to accept that they either put in equal work for equal reward, or they find some way to measure each others effort & pay appropriate reward (for example, via a bonus system).

Either that, or the Partnership will have to be dissolved.

If it's to be dissolved, one will have to buy out the other ...
If neither can afford to buy the other out, then one approach is to sell some of the assets of the business, thus both reducing the buy-out cost (fewer assets = less value in the Business) whilst providing (at least one of them) with additional funds with which to effect the buy-out.

If selling assets is would mean the Business would no longer be viable, it may be possible for the one owning most of the assets to borrow against these assets in order to buy-out the other partner.

Otherwise the Business will have to either be sold to a 3rd party as a 'going concern' (which sets the max. value of the Business = buy-out price) or be closed down and the assets liquidated (which sets the low end value = buy-out price).

Faced with these alternatives, hopefully the 2 can come to some agreement.

Answer 2

Spend a few thousand for a business analysis to establish the partner buy out price. There are way too may variable and this is probably going to be a legal battle. The original owner may have had the machinery, but it was partner #2 who made it all happen - that was his asset contribution. It doesn't seem fair, but the business doesn't sound like it would have been worth anything without his expertise - so try not to be stingy with the buyout. Or sell partner #1s interest and walk away. Funny how the price will change depending on weather you are a buyer or seller.