Partnership advice - walk away? buy partner out?

[Mabbo]

Hi,

Firstly, I'm not sure if this is the right section to ask these questions, but Im after some advice about my business. I'm part of a 50/50 partnership with a friend and I am considering leaving, or maybe buying him out? We are not a ltd company, and Im looking for advice on which would be the best approach.

1) One of my initial concerns is that I dont know how much the business is worth, and that on paper I think it looks as though I ow the business money:

My business partner had another job until around 12 months ago, at which point when he came to work at the business full time. Before then he worked a few evenings and Saturdays with me whilst I worked at the business full time for over 5 years while I tried to build the business up. Over this time I was lucky enough not to need a great wage so survived on around £500 a month doing 60 hour + weeks while he did around 10 hours a week without being paid.

As I understand it, when the accountant has done our accounts as a 50/50 partnership and I have taken a wage but my business partner hasn't, it looks as though I owe the business, or my business partner money even though I have done 99% of the work while my business partner had a full time job?

Also, I have put £2500 into the business to buy a spray booth and the business still ows me £1000 from a training course that we both went on. The business paid for my partners course, and I paid for my own course with the intention of taking the money back from the business when we had it because at the time the business didn't have enough money to pay for both of us.

We take deposits off customers to book a 'slot' (we do big project work) and the money disappears. The last few months have been tough as we have just moved into a new unit which has been a fairly big expense and a fair amount of 'down time'. Recently we have had £2500 worth of deposits for jobs that we haven't started yet, which has been used to cover wages / rent / the move etc whilst we haven't been earning, which I am not happy about.


2) Another concern is that as we are not a limited company, if I were to walk away from the business, then 3 months down the line the business closed, or my business partner didn't finish the jobs, or finish them to a good/safe standard, would I be liable for any of the jobs that were taken on when I was part of the business?


3) Keep at it and stay? Buy him out? Walk away? Not sure which would be best:

Since my business partner has been there full time I have realised we have different standards of work, different ways of working, and different ways of running the business. I have spoken to him about this several times and things were supposed to change. After initially thinking things were getting better nothing has really changed and I want to get out before things get too bad. I think our outlook on what is acceptable, and what standard of work Im happy to have my name on is different to his.

I dont want to leave as I have so much time and effort invested in the business, and I believe I have built a good reputation that Id be reluctant to walk away from and start again.

I also dont want to fall out with my business partner as he is a friend, but everyone who knows me tells me I need to get out as his work is not good enough and I am carrying him and constantly putting his poor work right.

I could go on but thats enough for now...

Im willing to listen to any advice / opinions on what to do for the best.

Thanks

 

[mhall]

I don't understand why you would owe the business money.

I am sure there is no point in asking if you have a Partnership Agreement as I would guarantee that you don't. This is a massive concern if true (if you do have one, I apologise - just follow that to the letter about dissolving)

If you are having second thoughts already then the partnership needs to be dissolved- properly. You are currently responsible for the debts of the business created by your partner, whether you know they exist or not. Get out as quickly as you can, this is not about friendship, it's about your own safety and security, and that of your family. At the moment, from what you say, you are putting that at risk and in the hands of someone who does not have the working standards your business needs. Whether you leave or "buy him out" is down to you but from what you say, the business has no real value so anything you pay will basically be to shut your partner up. No matter what you do the friendship will suffer - accept that and deal with it.

 

[Mabbo]

I don't understand why you would owe the business money.

I am sure there is no point in asking if you have a Partnership Agreement as I would guarantee that you don't. This is a massive concern if true (if you do have one, I apologise - just follow that to the letter about dissolving)

If you are having second thoughts already then the partnership needs to be dissolved- properly. You are currently responsible for the debts of the business created by your partner, whether you know they exist or not. Get out as quickly as you can, this is not about friendship, it's about your own safety and security, and that of your family. At the moment, from what you say, you are putting that at risk and in the hands of someone who does not have the working standards your business needs. Whether you leave or "buy him out" is down to you but from what you say, the business has no real value so anything you pay will basically be to shut your partner up. No matter what you do the friendship will suffer - accept that and deal with it.

Thanks for the reply

I thought I may owe the business money because I was taking a wage for years while my business partner wasnt taking anything (while he had a full time job) as I was the only one there... but the accounts have been done as 50/50 so I assumed we should have taken the same in wages? For eg, if we made 10k, I had 9k and my partner had 1k, with it being a 50/50 partnership I'll ow him 4k so we have had 5k each... Or am I completely over thinking that?

No, we don't have a partnership agreement.

As for buying him out, is it as simple as just making him an offer on what I think he may accept? I honestly don't think the business is worth anything. We have our own tools, the tools the business owns are prob around £1000 worth max.

We have spent £2500 worth of deposits we need to make back, and have around £2000 on a credit card. If I walk away or if the business were to dissolve, I assume I would be responsible for 50% of this?

Also, we have a 5 year lease on the unit we have just moved into, in both our names, not the business name. I guess even if I left the business I would be liable for the rent etc too?

I'll never go into a partnership again.

Thanks again

 

[Gecko001]

It is difficult to see what way this partnership works. As far as I can make out at present the accountant is preparing accounts which gives each partner 50% of the profit. Up until a year ago it was 50% of the profit each plus a "wage" for you. That all seems a bit strange for a partnership. It is fine for a Ltd company, but does it work that way for partnerships - maybe others here could tell us.

 

[Mabbo]

Thanks for the reply Gecko001.

Sorry, my last reply as it wasnt very clear and Im probably getting confused as my head is a bit of a mess at the moment.

Now we are both working there and have been taking equal amounts I know the accounts have been done at 50% of the profit each.

I cant remember how the accountant has prepared the accounts for previous years when I was working mainly on my own and taking more of the profits than my partner. I think it may have been done at 90/10 etc depending on how much each of us had from the profit. Id have to check.

Thanks

 

[STDFR33]

Ignore

 

[KAC]

It's not unusual for a partner to receive a prior share of profits as a partnership salary although it will be taxed as self employed income. For Example:
Profit £40,000
Salary Partner 1 £10,000
Balance £30,000
Divisible 50/50
Partner 1 £15,000
Partner 2 £15,000

So Partner 1 gets £25,000 and Partner 2 gets £15,000

 

[Paul Norman]

There is not much you can do to change the past, but you can fix what happens now.

You need to agree terms on a partnership agreement, and do it properly, so that the business can proceed with clear guidelines for you both. Actually, it would be worth taking advice on whether, in fact, it would be better to now set up a limited company. That would mean you would also need a shareholders agreement, and a contract of employment.

If such clarity is not forthcoming, then you will forever be faced with a growing level of risk that could result in significant personal liabilities.

As to buying the other partner out, that would also require a professional person to place a value on the business. The most likely value, given your narrative, is zero, but it is unlikely that the other partner is going to accept that for a buy out deal. So it will come down to a negotiated amount that will have more to do with your willingness to part with money than the actual value of the business.

Also, from what you have said, it does not look as though you owe the business money, unless your accountant has not prepared the books correctly. Your accountant should be able to show you the up to date figures, and explain what they mean. I would request that they do this.

 

[Chris Ashdown]

Normally in a partnership, both parties are equally and jointly responsible for the business and its debts, so if say you broke up and closed the business any person or company you owed money to would go after each of you for 50% but if one cannot pay the 50% then they go after the other partner for the full 100% from them

The government has issued a standard partnership agreement they implement if there is not a partner ship agreement in place, so google it

If you managed to buy him out could you afford the rent on the new property, as that may be the largest cost outstanding to pay off a few years lease

 

[The Byre]

Another obvious case for @The Resolver and I suggest that the OP looks him up and thinks about commissioning his services.

One of my initial concerns is that I dont know how much the business is worth,

I can save you the trouble and money here - if you and your partner are the only staff, then it is worth precisely nothing, except perhaps the fire-sale value of any equipment and any other physical assets. Sorry, but that's the reality.

 

[Mabbo]

Another obvious case for @The Resolver and I suggest that the OP looks him up and thinks about commissioning his services.

I can save you the trouble and money here - if you and your partner are the only staff, then it is worth precisely nothing, except perhaps the fire-sale value of any equipment and any other physical assets. Sorry, but that's the reality.

Thanks again for all the replies

No need to say sorry, its what I expected. The assets are next to nothing, other than the spray booth that I paid for.

From what everyone has said, it sounds like a bit of a loose loose situation.