Sabtu, 10 Maret 2007

Buying out your partner, Pt. 2--think ahead

If, in your "partnership" (whether it be in form a two-person LLC, corporation or a true partnership), you believe there is beginning to be inequities in the amount of output you are producing versus the amount of profits you are receiving, you should immediately take stock of your situation. What circumstances am I talking about?

1. Perhaps your partner put up the money, and you're doing the work; or
2. Perhaps you're both 50/50 owners of the company, but feel like you're putting in more time and effort, and/or are producing more profits.

The longer your relationship continues, the more "in-equity" you might build. For example, consider Mr. A and Mr. B who twenty years ago set up a two-man corporation. The corporation owns their company vehicles, their building, and some cash assets invested over the years. At the end of the year, most of the profits are taken out of the company and given in equal shares to the two shareholders.

Over the years, however, Mr. A has developed a niche market in their business. His clients and their jobs are higher-end, require more labor, but produce a larger profit. Mr. B has not grown his side of the business over the years, and in fact, has let a few of his clients drop since he's getting older and doesn't want to work as many hours.

In fact, now, Mr. A brings in approximately 70 percent of the company's gross earnings, and Mr. B only 30 percent. Finally, Mr. A has enough, and tells Mr. B it's time they split up. At this point, if the two can't agree, Mr. A can ask the courts to split up and dissolve their corporation, pay off debts, and then divide the assets. Unfortunately for Mr. A, however, the assets will be split in proportion to stock ownership: 50 percent each; which is not in proportion to the amount worked.

Perhaps Mr. A had, when he set up his company, entered into some sort of agreement by which he could buy out Mr. B at some point. That's savvy, but if the purchase price is determined by the company's value, Mr. A has hurt himself by letting things drag on so long. He's increased the value of the company by his own labor, and is now going to have to pay Mr. B a premium for his stock--stock that rose in value primarily by Mr. A's actions!

The lesson to be learned from this story is that if you enter into a small company or joint venture, be aware that if the labor and/or production starts to skew unevenly, do not let the situation linger, or you may end up not only working harder than your partner, but one day having to pay more for the valuable product you created.

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