Is A Partnership Goodwill Payment Relevant?

[mickdhill]

In 2019 we established a garden maintenance business, which was set up as a general business partnership between two people. A business partnership agreement was signed by both of us in the presence of a witness. The net profits of the partnership were apportioned amongst the partners equally. I originally spent £5,000 of my own money to purchase equipment and a van, which my business partner then gave me £2,500 for his share when the business became profitable.

I carried out all of the research to set up the business, created a website, designed flyers, advertising etc., whereas my partner did none of these. We both carried out the gardening as a two man team. My other roles in the business where advertising, the daily planning of jobs, research and development, accounts and invoicing and completion and submission of tax returns. My business partners only other role was to text or call the customers from the daily job list I gave him.

His behaviour became very erratic about 18 months ago. He became aggressive during work, throwing tools in anger on a couple of occasions. He insisted he needed to be at home before 5 o'clock every day as he had a dog to care for, which made planning work difficult. His general attitude became lacklustre and negative, with no intention to improve the business.

In September 2021, he sent me an email out of the blue saying that he wanted to end the business partnership. He refused to answer my calls or texts to discuss things further. When I eventually spoke to him, he told me he "wasn't in a good place". I told him to have a couple of weeks off to think about things, whilst I ran the business on my own. After a week he came to see me to explain he had made a rash decision and he would like to continue with the business, to which I agreed.

Since then, there have been numerous days where he has not worked. He notifies by text early in the morning, saying that he can't work today, which causes me great difficulty as I have to contact customers to postpone or re-arrange their visit, which is very unprofessional. In June of this year, he took a weeks holiday during the busiest time of our year.

On 9th August 2022, he sent me a text at 4 o'clock in the morning saying that he was too unwell to work. Since this date he has not carried out any work in relationship to the business. I have continued to run the business on my own, working 7 days a week and averaging 80 hours each week. I feel the need to do this to keep the business going as we have a number of regular, loyal customers.

On 10th September 2022, he sent me an email informing me that he will withdraw from the business due to ill health once I have "bought him out". He informed me that he had spoken to an advisor in commercial tax law and that he was entitled to a "goodwill" payment. The formula he was told to use was :- (Income Year 1 + Income year 2) divided by two. He claimed he was not using the income from year three and four as he had done very little for the business during those years.

On 22nd September 2022, he sent me a further email claiming that the figure he was requesting does not represent the true value of the goodwill of the partnership, but should be based on 3 years of trading. However, in order to expedite the process by avoiding the necessity of accountants and solicitors and for the steady continuation of service to our customers, the original formula he suggested would be received amicably and accepted. If the payment was paid before 01/11/2022, this transaction will effectuate his immediate withdrawal from our partnership and all his assets and interests therein be transferred to me.

Is a goodwill payment relevant in this situation and if so would you say my business partners request is reasonable?

Clause 14 of our business partnership agreement- "Termination: This partnership shall be terminated by the death or material incapacity of any partner, mutual agreement, or upon the written request for termination made by any one partner. Upon termination by reason of death, incapacity or request, the remaining partners shall have the right to continue the business of the partnership on their own behalf or together with new or additional partners, provided they pay the terminated partner the fair market value of his partnership interest together with suitable indemnification for all of their existing partnership obligations.

Clause 13 of our business partnership agreement - Authority: No parties shall, without the consent of the other partners: Pledge, hypothecate or in any manner transfer his interest in the partnership.

Is my business partner in breach of clause 9 of our business partnership agreement, especially as he claimed he did very little for the business in the past two years. If so, what action could I take?

Clause 9 of our business partnership agreement - "Duties: Each partner shall devote his full time and best efforts on behalf of the partnership business."

Is there a Fiduciary duty breach as the duty of loyalty requires partners to place the success and interests of the partnership above their own personal interest. I don't feel my business partner did this, so what action could I take?

I am also concerned that my business partner has access to the business bank account even though he no longer contributes towards the success of the business. What options do I have to remove him from the mandate?

Although the profits were shared equally between the two of us, the work load was not, especially in the past two years. My extra roles included advertising, the daily planning of jobs, research and development, accounts and invoicing and completion and submission of tax returns, which my business partner was unwilling to do. I regularly carried out an extra 20 hours per week to carry out these duties. Is there an option to invoice/charge my business partner for this extra time?

Any advice on where I stand and a course of action to resolve this would be greatly appreciated.

 

[MBE2017]

Personally I would look at your bank account, and divide it in two, plus a fair amount for your assets to get rid of him ASAP.

Before you do it would be best to consult your solicitor on behalf of the company on the best way to treat the matter.

You need to get sole control on the finances ASAP, websites, emails etc, get his authority removed at the bank and so on first, urgently. I doubt your partner will argue too much, I doubt he has the funds anyway.

If you have problems financially getting control, consider a new bank account with you solely in charge, and start diverting payments into it. You need to protect your interests ASAP.

 

[mickdhill]

Personally I would look at your bank account, and divide it in two, plus a fair amount for your assets to get rid of him ASAP.

Before you do it would be best to consult your solicitor on behalf of the company on the best way to treat the matter.

You need to get sole control on the finances ASAP, websites, emails etc, get his authority removed at the bank and so on first, urgently. I doubt your partner will argue too much, I doubt he has the funds anyway.

If you have problems financially getting control, consider a new bank account with you solely in charge, and start diverting payments into it. You need to protect your interests ASAP.

Thanks for the reply. He is unwilling to remove his name from the bank account until I pay him a goodwill payment. I have spoken to the bank and they have said my business partner has to voluntarily remove his name from the account.

Setting up a new bank account may be an option, but as 90% of my 50+ customers are on a standing order it is ideally something I would do as a last option.

Do you feel a goodwill payment is even relevant in this situation, or do you think my business partner is in breach of contract? Thanks

 

[bodgitt&scarperLTD]

How much money is in the bank account?

Personally I'd be swallowing the hassle of setting up a new account right now and calling the customers personally to explain the situation (explaining how sorry you are for his mental health, how you've given him every chance, and also how service may be disrupted for a few weeks. The saving grace here is that whilst they are your only source of income, he doesn't sound to have the brains or inclination to go and poach them for himself). Whilst you are at it- consider your options. If you wish to continue alone, now is the time to focus on saving the best/most profitable customers, and drop the whingers and tightwads- don't neglect this step. Telling a poor customer to swivel (metaphorically speaking) is a great feeling.

I'd also empty the business account of everything. Then I'd transfer him his original £2500 investment and tell him to whistle Dixie. This kind of thing happens every day in partnerships. The only ship guaranteed to sink, and all that. Only the biggest cases will end up in court- no chance here.

If you really want to be fair, then get an independant valuer in- and tell them the score. The value of your business, and I can tell you this without knowing any more than the fact that you are a jobbing gardener, is the firesale value of your tools. Goodwill, customer base, it's all worth the square root of naff all unless you have yearly contracts that the customer cannot exit at will.

Gardening is an easy trade with no barriers to entry. I could follow you around your rounds knocking on the doors offering to do a cheaper job and most likely the customer would go for it- unless it's YOU they want. Which I suspect it is- not your 'partner'.

Get shot- he's a leech, a dead weight and a chancer.

 

[MBE2017]

Thanks for the reply. He is unwilling to remove his name from the bank account until I pay him a goodwill payment. I have spoken to the bank and they have said my business partner has to voluntarily remove his name from the account.

Setting up a new bank account may be an option, but as 90% of my 50+ customers are on a standing order it is ideally something I would do as a last option.

Do you feel a goodwill payment is even relevant in this situation, or do you think my business partner is in breach of contract? Thanks

Personally I think he is entitled to 50% value of your business at today’s value at best. Can you access the bank account?

At the moment you are both talking, but what happens if he withdraws all your money overnite if he feels you are not being fair? I would open another account today, transfer the whole account over, and set up an automatic transfer for any funds that are received into the old account as well.

Don’t look for answers on the forum, even a solicitor at best will say depending on everything, need to see your agreements in full etc, to ensure they give correct legal advice, and rightly so.

This is one of those occasions you should not bulk at the idea of getting legal advice, charge it too the company.

 

[The Byre]

Clause 14 is the one that counts here - he has requested his exit and the terms are laid out in that clause. Fair value would be half of the value of the tools at used (firesale?) prices. Goodwill is more difficult to assess, but (for a micro-business) two-times net profit minus about £20k to £25k (London rates) per gardener, so the calculation could look like this -

Value of tools and vehicle in present condition - £5,000
Turnover £50,000 p.a. so for two years - £100,000
Two years pay for two gardeners - £80,000
Other costs for two years (website, van, insurance, etc.) - £10,000
Net profit over two years - £10,000
Half share to be paid out to each departing partner - £5,000

Please note that many people fail to account for wages for a business owner and count their wages as being part of the profitability of a business. Look at it this way - were I to buy your gardening business and just employ you as a gardener, you would quite rightly, expect to be paid and that pay would be PAYE as a full-time employee. That rate and that rate alone must be the calculation used when valuing a business.

In reality of course, to pay a man £20k gross would cost far more than £20k and that would mean that in order to leave, he could end up paying you to leave - and I am assuming that this is a common law partnership in accordance with the Partnership Act of 1890, which stipulates that when a partnership is dissolved, the assets are split equally between the partners, which seems also to be reflected in your agreement.

Apart from that, follow @bodgitt&scarperLTD 's advice, especially about dumping the poor-paying customers. Use your partner's departure as an excuse.

 

[Mark T Jones]

As always in these threads, we are hearing one side of a story, so our advice will be skewed.


However, on the face of it I'm inclined to agree with @bodgitt&scarperLTD

 

[DontAsk]

Personally I think he is entitled to 50% value of your business at today’s value at best. Can you access the bank account?

It could be argued that today's value is a lot less than he thinks, due to his behaviour.

 

[brucegreig]

I'd broadly agree with other replies, but would urge caution around doing anything which makes *you* look like the bad guy (e.g. suddenly emptying the bank account). He may well be in breach of the agreement, but it isn't clear without legal advice what the consequences of that breach are, or what you can do about it.

I have seen partnership disputes which escalate and drag on for years, because each side thinks the other is the scoundrel, and they don't want to "give in", and the time and cost and stress this creates far outweighs the value in the underlying partnership.

As others have said, prepare a sensible valuation for the partnership assets (which might be very low), offer him his share and be as polite and professional as possible throughout this process. Focus on getting a resolution, even if that means paying some small amount which you don't think you really ought to pay. e.g. there might be a tiny chance this whole thing drags on and costs tens of thousands. That's not likely, but it is probably possible, so you might decide to pay a small sum now to eliminate that small risk.

 

[mickdhill]

How much money is in the bank account?

Personally I'd be swallowing the hassle of setting up a new account right now and calling the customers personally to explain the situation (explaining how sorry you are for his mental health, how you've given him every chance, and also how service may be disrupted for a few weeks. The saving grace here is that whilst they are your only source of income, he doesn't sound to have the brains or inclination to go and poach them for himself). Whilst you are at it- consider your options. If you wish to continue alone, now is the time to focus on saving the best/most profitable customers, and drop the whingers and tightwads- don't neglect this step. Telling a poor customer to swivel (metaphorically speaking) is a great feeling.

I'd also empty the business account of everything. Then I'd transfer him his original £2500 investment and tell him to whistle Dixie. This kind of thing happens every day in partnerships. The only ship guaranteed to sink, and all that. Only the biggest cases will end up in court- no chance here.

If you really want to be fair, then get an independant valuer in- and tell them the score. The value of your business, and I can tell you this without knowing any more than the fact that you are a jobbing gardener, is the firesale value of your tools. Goodwill, customer base, it's all worth the square root of naff all unless you have yearly contracts that the customer cannot exit at will.

Gardening is an easy trade with no barriers to entry. I could follow you around your rounds knocking on the doors offering to do a cheaper job and most likely the customer would go for it- unless it's YOU they want. Which I suspect it is- not your 'partner'.

Get shot- he's a leech, a dead weight and a chancer.

Thanks for the reply. Setting up a new bank account is looking like the only option and paying him back the fair market value of the assets.

 

[mickdhill]

Personally I think he is entitled to 50% value of your business at today’s value at best. Can you access the bank account?

At the moment you are both talking, but what happens if he withdraws all your money overnite if he feels you are not being fair? I would open another account today, transfer the whole account over, and set up an automatic transfer for any funds that are received into the old account as well.

Don’t look for answers on the forum, even a solicitor at best will say depending on everything, need to see your agreements in full etc, to ensure they give correct legal advice, and rightly so.

This is one of those occasions you should not bulk at the idea of getting legal advice, charge it too the company.

I'm not keen on emptying the business account as this could look bad on me.

 

[Newchodge]

I'm not keen on emptying the business account as this could look bad on me.

How will it look if he does it?

 

[mickdhill]

Clause 14 is the one that counts here - he has requested his exit and the terms are laid out in that clause. Fair value would be half of the value of the tools at used (firesale?) prices. Goodwill is more difficult to assess, but (for a micro-business) two-times net profit minus about £20k to £25k (London rates) per gardener, so the calculation could look like this -

Value of tools and vehicle in present condition - £5,000
Turnover £50,000 p.a. so for two years - £100,000
Two years pay for two gardeners - £80,000
Other costs for two years (website, van, insurance, etc.) - £10,000
Net profit over two years - £10,000
Half share to be paid out to each departing partner - £5,000

Please note that many people fail to account for wages for a business owner and count their wages as being part of the profitability of a business. Look at it this way - were I to buy your gardening business and just employ you as a gardener, you would quite rightly, expect to be paid and that pay would be PAYE as a full-time employee. That rate and that rate alone must be the calculation used when valuing a business.

In reality of course, to pay a man £20k gross would cost far more than £20k and that would mean that in order to leave, he could end up paying you to leave - and I am assuming that this is a common law partnership in accordance with the Partnership Act of 1890, which stipulates that when a partnership is dissolved, the assets are split equally between the partners, which seems also to be reflected in your agreement.

Apart from that, follow @bodgitt&scarperLTD 's advice, especially about dumping the poor-paying customers. Use your partner's departure as an excuse.

Thanks. Your formula seems to be much more of a reasonable way of working things out.

 

[MBE2017]

I'm not keen on emptying the business account as this could look bad on me.

Your choice.

You could argue you are being blackmailed atm by your partner, who refuses to take himself off the bank finance etc until you pay him. He is hardly doing things right either.

 

[mickdhill]

I'd broadly agree with other replies, but would urge caution around doing anything which makes *you* look like the bad guy (e.g. suddenly emptying the bank account). He may well be in breach of the agreement, but it isn't clear without legal advice what the consequences of that breach are, or what you can do about it.

I have seen partnership disputes which escalate and drag on for years, because each side thinks the other is the scoundrel, and they don't want to "give in", and the time and cost and stress this creates far outweighs the value in the underlying partnership.

As others have said, prepare a sensible valuation for the partnership assets (which might be very low), offer him his share and be as polite and professional as possible throughout this process. Focus on getting a resolution, even if that means paying some small amount which you don't think you really ought to pay. e.g. there might be a tiny chance this whole thing drags on and costs tens of thousands. That's not likely, but it is probably possible, so you might decide to pay a small sum now to eliminate that small risk.

Thanks Bruce. I totally agree that emptying the bank account wouldn't be wise. I have remained polite and professional as you suggest as I don't want to antagonise him and make the situation worse. I feel my only option now is to employ the services of a solicitor as this needs to be resolved.

 

[mickdhill]

How will it look if he does it?

It will look bad for him.

 

[bodgitt&scarperLTD]

It will look bad for him.

And how much will it mess up cash flow?

You’re not a director I presume, but even so- you should always be acting solely in the interest of the business.

 

[The Resolver]

Short of reaching agreement ,you should not empty the bank and take over the partnership clients. It will not just look bad but amount to a breach of the partnership.

You first have to terminate the partnership and notify the Bank accordingly. If no agreement is reached as to how to share out the net assets or as to who shall run the business henceforth. then you have to cease trading , sell assets , pay creditors, do a final set of partnership accounts, and divide equally the net balance. But a much more sensible way forward would be to speedily reach an agrement whereby you acquire the business/assets from the partnership.

The fact that he breached the Agreement in not working enough in theory means he could owe the partenrship a sum that represents the losses that resulted, But if no loss really resulted save that you worked much longer hours than he did, then you have to accept that. Yes you could sue him for the loss of your free time but the cost and anxiety and risk of an adverse outcome is just not worth it. Really it was for you to terminate the partnership when that problem first arose. For now you just want to come out of this with your half share and able to tell the clients that you are now free to look after their gardens.

To reach speedy agreement you need to mediate. I am a solicitor and mediator who specialises in shareholder and business partner disputes. . Take the free advice call