Even in the Charlotte Metro area, which has tended in the last decade to better weather tough economic times than most parts of the country, we're filling the pinch of the current economic downturn.
Many of my clients have told me that their business is down: fewer homes are being buit, materials purchased, real estate sold, and so on. This, of course, is no surprise, and many of my clients are currently retooling their business to help bring in additional income during these times.
But staying profitable isn't just about earning money off of new business; it also means that you need to get paid for the business you have already performed. It's easier to lose one job (and the potential income) than it is to perform the job, expend the effort, labor and materials, then not get paid. For many of my clients, it may take two or three paying jobs to cover the cost of one job for which they didn't get paid.
How, then, can you protect yourself so that you get paid for the work you do, so that you get paid?
1. Written contract. Many of my clients are subcontractors (brickmasons, graders, plumbers, etc.), who work on houses, and they rarely get a written contract with the person or company who hired them. However, this is very important. Obviously, a written contract will show proof there's an agreement, but that's the least important factor (after all, if you've done the work, that's proof as well). No, a contract is more important because it will outline the terms of what you are supposed to do, and when you can collect your money, so that your client can't hold you at bay (e.g., saying, "I'm not paying you until the house is finished by everyone"). Also, in North Carolina, you typically can't collect attorney's fees unless you have a contract providing for it, nor can you collect interest on late payments without an applicable provision in your contract. Sure, if you hire an attorney who successfully collects your fee, you're somewhat relieved; but you'll also be disappointed once you subtract his fee, and realize that your money could've been earning interest over the six months it took to collect. By contrast, a well-written contract could provide that the debtor has to pay you 15 percent attorney's fees and legal costs if you have to sue, and can provide for 18 percent annual interest on bills more than 30 days due.
2. Personal guaranty. Many clients simply do business with the "company," even if the company is a one-man operation. If you're doing business, attempt to wrangle a personal guaranty, in writing, from clients. In other words, if you don't get paid, the person with whom you're dealing should personally guarantee payment of the debt. If you're performing contract work for, e.g., Wachovia Bank, this may not be possible. But I suspect most of your clients are small businesses. These businesses' owners have to guarantee their bank loans; make them guarantee payment for your work. If a business owes two bills, and one of them is personally guaranteed, the bill personally guaranteed will be paid first--simply because that bill shall cause the owner personal liability and therefore is more urgent!
3. Cutting off work early. Nobody wants to quit a job or stop supplying a customer, but as a small business owner, you need to be careful not to extend credit for too much work/supplies, nor should you let the unpaid bills linger. Often, a customer may get further in debt trouble the longer your bill lingers. If you haven't been paid in 30 days, do not continue to supply services, material or labor, or you can be getting YOURSELF further indebted to your customers. Some of my clients used to take a "double down" gambling approach: they know they shouldn't keep supplying goods or services, but don't want to make their customer mad and have them walk away. The problem with this approach is that the more the customer owes you, the more desperate YOUR become, and the harder the debt becomes to pay. Get out early, and collect your debt--by lawsuit if necessary. My clients, under my advice, now cut off credit after 30 days and send accounts to me shortly thereafter. Some of their customers get upset, but in the past two years, many of their customers became insolvent--but we got paid because we called our accounts due while there was still money for us to be paid.
If you have questions about account collections or creditors' rights, please contact me for an appointment at 704-735-0483.
Sabtu, 27 September 2008
Minggu, 14 September 2008
The Art of Killing the Deal
I've had the privilege, in my business law practice, to work on transactions and cases with good lawyers not only in my own state, but in other states as well. Each state (and state's lawyers) brings with it its own subculture and quirks. However, I've never, until a recent transaction, worked with attorneys who seemed hell-bent on picking a deal apart until it died a painful death.
I'll caveat what I write next with the possibility that perhaps I and/or my client were played, and (for whatever reasons) were manipulated for reasons we don't understand. But assuming not, I'll try to provide a few non-identifying details. My client, a commercial contractor, has certain niche construction that it has perfected and gained a reputation for in that niche. So much so, in fact, that it has expanded its operations in numerous states all over the U.S.
My client is run by its astute owner, who understands his own risk tolerance. Therefore, in negotiations, once he's received my advice, he accepts some, and rejects other, and we tend to quickly come to agreements with the other party. We negotiate hard, but we're flexible--and my client has become very successful with this.
But this time things simply have not worked out, and they may now crash and burn. We sent the other party a standard document, and what usually would be a process of a couple of negotiating back-and-forths has turned, instead, into months of excrutiating negotiation from the attorneys, nitpicking over minutae, creating far-fetched scenarios to justify their extreme positions. The result of this is that my client may simply be unable to do a deal with this client, and because of the length of time in these ridiculous negotations may no longer be able to enter into this contract anymore. Here then, are my own thoughts about the role of an attorney in negotiating a business transaction.
1. The attorney's role is to inform and protect. Notice that I didn't say just to protect. Of course, an attorney is supposed to protect his client, but in a business transaction, the client needs to understand what is contained in the contract or transaction. I always tell a new business client something like this: "I can protect you in a contract so that you're as protected as you'd ever want to be--but nobody would probably ever sign it." The point is, a contract that is too one-sided in favor of my client would not be commercially reasonable. Therefore, I try to protect my client as much as I can, but there will be issues on which the other party will not budge (perhaps, for example, the seller of a business will only allow my client 30 days due diligence). My job then is to let my client know the tough spots, let him know the risks, and fully inform my client so that he can make an informed risk decision about what he should do.
2. The attorney's role is not to be a roadblock in the way of the client's goals. Business clients, espcially experienced ones, are not children. Your job as an attorney is not to protect a client from himself, and shouldn't argue and negotiate ad infinitim. Some attorneys seem to get some pleasure in negotiating, haggling, and fighting for even the most minute and unimportant provisions in the contract, mentally chalking up points for every single concession they've obtained. I don't know what the "opposing counsel" feels like the score is in the contract I've been working on, but to me, we both score a big fat zero when a perfectly good deal dies as a result of the lawyers. If you want to fight and beat up your opponent, be a litigator! Transactional attorneys are supposed to HELP their clients accomplish goals.
3. The role of a business attorney is to help a client achieve goals, not to thwart them. This particular client has big goals (as do many of my clients). My job is to help these clients meet their goals: by making sure they comply with applicable laws, by drafting contracts that protect them and by helping them perform careful analysis so their dreams do not turn into nightmares. Yes, there are times when it is my job to tell a client, as I did a week ago, that a particular deal SHOULD NOT be done. But with most deals and most clients, it is a balancing act whereby I try to help my client reach what is a workable goal on a workable deal, while protecting the client.
Does this mean that I'm a "yes man" for my clients? Absolutely not. I often have to tell clients that the way they want to do something will, e.g., violate a contract or will not comply with the law. But for a good business attorney, the work doesn't stop there. My job then becomes how to help my client still reach that goal WITHIN the constrictions of law, contract and all practical considerations.
I look back at my clients, and what they have accomplished, and I am proud that I can say I have had a role (however small) in these accomplishments. Do these lawyers to which I refer take pride in how many deals they've killed?
I'll caveat what I write next with the possibility that perhaps I and/or my client were played, and (for whatever reasons) were manipulated for reasons we don't understand. But assuming not, I'll try to provide a few non-identifying details. My client, a commercial contractor, has certain niche construction that it has perfected and gained a reputation for in that niche. So much so, in fact, that it has expanded its operations in numerous states all over the U.S.
My client is run by its astute owner, who understands his own risk tolerance. Therefore, in negotiations, once he's received my advice, he accepts some, and rejects other, and we tend to quickly come to agreements with the other party. We negotiate hard, but we're flexible--and my client has become very successful with this.
But this time things simply have not worked out, and they may now crash and burn. We sent the other party a standard document, and what usually would be a process of a couple of negotiating back-and-forths has turned, instead, into months of excrutiating negotiation from the attorneys, nitpicking over minutae, creating far-fetched scenarios to justify their extreme positions. The result of this is that my client may simply be unable to do a deal with this client, and because of the length of time in these ridiculous negotations may no longer be able to enter into this contract anymore. Here then, are my own thoughts about the role of an attorney in negotiating a business transaction.
1. The attorney's role is to inform and protect. Notice that I didn't say just to protect. Of course, an attorney is supposed to protect his client, but in a business transaction, the client needs to understand what is contained in the contract or transaction. I always tell a new business client something like this: "I can protect you in a contract so that you're as protected as you'd ever want to be--but nobody would probably ever sign it." The point is, a contract that is too one-sided in favor of my client would not be commercially reasonable. Therefore, I try to protect my client as much as I can, but there will be issues on which the other party will not budge (perhaps, for example, the seller of a business will only allow my client 30 days due diligence). My job then is to let my client know the tough spots, let him know the risks, and fully inform my client so that he can make an informed risk decision about what he should do.
2. The attorney's role is not to be a roadblock in the way of the client's goals. Business clients, espcially experienced ones, are not children. Your job as an attorney is not to protect a client from himself, and shouldn't argue and negotiate ad infinitim. Some attorneys seem to get some pleasure in negotiating, haggling, and fighting for even the most minute and unimportant provisions in the contract, mentally chalking up points for every single concession they've obtained. I don't know what the "opposing counsel" feels like the score is in the contract I've been working on, but to me, we both score a big fat zero when a perfectly good deal dies as a result of the lawyers. If you want to fight and beat up your opponent, be a litigator! Transactional attorneys are supposed to HELP their clients accomplish goals.
3. The role of a business attorney is to help a client achieve goals, not to thwart them. This particular client has big goals (as do many of my clients). My job is to help these clients meet their goals: by making sure they comply with applicable laws, by drafting contracts that protect them and by helping them perform careful analysis so their dreams do not turn into nightmares. Yes, there are times when it is my job to tell a client, as I did a week ago, that a particular deal SHOULD NOT be done. But with most deals and most clients, it is a balancing act whereby I try to help my client reach what is a workable goal on a workable deal, while protecting the client.
Does this mean that I'm a "yes man" for my clients? Absolutely not. I often have to tell clients that the way they want to do something will, e.g., violate a contract or will not comply with the law. But for a good business attorney, the work doesn't stop there. My job then becomes how to help my client still reach that goal WITHIN the constrictions of law, contract and all practical considerations.
I look back at my clients, and what they have accomplished, and I am proud that I can say I have had a role (however small) in these accomplishments. Do these lawyers to which I refer take pride in how many deals they've killed?
Sabtu, 06 September 2008
Venture Capital, Part Two
One of the biggest things to consider when entering into (either side of) a venture capital agreement is to determine whether the capital infusion will be treated as debt, as equity, or a mixture of both. I will write this article from the standpoint of the venture capitalist, although you, the reader, will quickly comprehend the different advantages and disadvantages for the recipient of the capital as well.
When providing venture capital for a startup, should you structure your capital as a loan to the company, as partial ownership in the company, or as some combination of both?
First, consider the advantages and disadvantages to treating the capital infusion as a loan.
Advantage One: Security. Venture capitalism is a speculative matter. That is, you, the capitalist, are putting money into a venture that may or may not succeed. If the business fails, will you get all, some or none of your money back? Part of that may depend on whether, if the business goes bust, you are treated as a creditor or as an owner. When a business becomes financially insolvent, any remaining assets or monies are typically paid out according to certain priorities. There are many nuances, but put simply, creditors will be paid before the owners. Therefore, if the business fails, you have a BETTER chance of getting paid if you have structured yourself as a creditor than if you have structured yourself as an owner.
Advantage Two: Protection. Similar to the first advantage described, structuring the transaction as a loan will give the venture capitalist more protection than as an equity owner. Often, the venture capitalist will not be involved with the day-to-day operation of the company. I have seen numerous instances in which the business operators mismanaged the funds of the "money partner," spending in a deficit until nothing was left. By structuring the capital as a loan--and more importantly, as a loan secured by collateral of the company--the venture capitalist can better protect against the squandering or liquidation of the assets. Using an example, say the operation is run by the two majority shareholders, and you, the venture capitalist, provided $250,000 for a 33 percent stake. If the majority shareholders, who saw the business was floundering, decided to start selling off the company property to keep funds coming (and to pay their salaries), they could do it. And if they did it quickly enough, you would not know about it soon enough to stop it. By the time the company went bust, there would be nothing left to divide. On the other hand, if you were a secured creditor, the shareholder/operators would be unable to sell off the company property without paying you off first (or at least, getting your permission to sell).
Advantage Three: Control. Believe it or not, being a creditor of the company may give you more control than being an equity holder. As a simple shareholder, you can be outvoted on many of the corporate decisions unless you are given a majority of the stock (which is unlikely). As a creditor, however, you can place certain restrictions within the initial loan agreement, such as:
1. Prohibitions against selling off the assets;
2. Prohibitions against the company owners taking excessive salaries or dividends;
3. Prohibitions against taking major company actions without the approval of the creditor.
Of course, there are disadvantages to treating the venture capital infusion as a purely loan transaction. The biggest, and most important, is that a loan limits the amount of profit that can be realized. A loan will contain interest, and some sort of repayment plan. At the end of the day, there is ceiling to what profit the creditor can realize. For example, if the venture capitalist provides a $100,000 loan for five years at eight percent interest,then the capitalist would know that, at best, he would realize a total profit of $21658.36--and that's if the loan is not paid off early! Remember too, that venture capital involves, quite often, higher than average risk, for which a venture capital should expect (if successful), a higher than average reward. There are easier ways to earn eight percent returns than by investing in risky ventures that may completely fail.
Owning equity in the company, of course, allows the venture capitalist a chance to share in both the risks and rewards of the start-up company. In theory, as an equity holder, the capitalist risks losing his investment if the company busts, but shares the potential reward with all other shareholders if the company succeeds.
The disadvantages to being an equity holder are, as you may guess, the converse to the advantages of lending shown above.
1. Security. If the company goes bust, an equity holder is the last in line to get paid from the remaining company assets (and usually, there are none by that time).
2. Protection and Control. As a pure equity holder, the capitalist will have less chance to exert control over the company, and stands a higher chance of being susceptible to abuse by the majority shareholders.
What then is the best approach? There is no solution that fits all, but a typical venture capital deal will try to combine the two approaches: that is, the venture capitalist's money is treated in part, like a loan, but also provides the capitalist an ownership interest in the company. The following are some of the provisions that may be found in this approach:
1. Typical loan provisions, that provide a promise to repay (a promissory note), as well as some sort of security (for example, a lien on company assets).
2. Restrictions that the company cannot take certain actions (selling all of its equipment, for example) while the loan is still outstanding.
3. Sometimes, a provision that, at a given time, part or all of the loan is converted into stock.
4. A certain amount of stock ownership.
5. A guaranteed director or number of directors on the company's board.
6. A shareholder agreement that the company may not issue additional stock without the venture capitalist's approval.
7. A provision that provides the start-up owners the right to buy out the venture capitalist or, conversely, a provision giving the venture capitalist the right to force his stock to be bought.
If you have questions about engaging in a venture capital agreement in North Carolina, please contact me for an appointment at wldeaton@ppd-law.com
When providing venture capital for a startup, should you structure your capital as a loan to the company, as partial ownership in the company, or as some combination of both?
First, consider the advantages and disadvantages to treating the capital infusion as a loan.
Advantage One: Security. Venture capitalism is a speculative matter. That is, you, the capitalist, are putting money into a venture that may or may not succeed. If the business fails, will you get all, some or none of your money back? Part of that may depend on whether, if the business goes bust, you are treated as a creditor or as an owner. When a business becomes financially insolvent, any remaining assets or monies are typically paid out according to certain priorities. There are many nuances, but put simply, creditors will be paid before the owners. Therefore, if the business fails, you have a BETTER chance of getting paid if you have structured yourself as a creditor than if you have structured yourself as an owner.
Advantage Two: Protection. Similar to the first advantage described, structuring the transaction as a loan will give the venture capitalist more protection than as an equity owner. Often, the venture capitalist will not be involved with the day-to-day operation of the company. I have seen numerous instances in which the business operators mismanaged the funds of the "money partner," spending in a deficit until nothing was left. By structuring the capital as a loan--and more importantly, as a loan secured by collateral of the company--the venture capitalist can better protect against the squandering or liquidation of the assets. Using an example, say the operation is run by the two majority shareholders, and you, the venture capitalist, provided $250,000 for a 33 percent stake. If the majority shareholders, who saw the business was floundering, decided to start selling off the company property to keep funds coming (and to pay their salaries), they could do it. And if they did it quickly enough, you would not know about it soon enough to stop it. By the time the company went bust, there would be nothing left to divide. On the other hand, if you were a secured creditor, the shareholder/operators would be unable to sell off the company property without paying you off first (or at least, getting your permission to sell).
Advantage Three: Control. Believe it or not, being a creditor of the company may give you more control than being an equity holder. As a simple shareholder, you can be outvoted on many of the corporate decisions unless you are given a majority of the stock (which is unlikely). As a creditor, however, you can place certain restrictions within the initial loan agreement, such as:
1. Prohibitions against selling off the assets;
2. Prohibitions against the company owners taking excessive salaries or dividends;
3. Prohibitions against taking major company actions without the approval of the creditor.
Of course, there are disadvantages to treating the venture capital infusion as a purely loan transaction. The biggest, and most important, is that a loan limits the amount of profit that can be realized. A loan will contain interest, and some sort of repayment plan. At the end of the day, there is ceiling to what profit the creditor can realize. For example, if the venture capitalist provides a $100,000 loan for five years at eight percent interest,then the capitalist would know that, at best, he would realize a total profit of $21658.36--and that's if the loan is not paid off early! Remember too, that venture capital involves, quite often, higher than average risk, for which a venture capital should expect (if successful), a higher than average reward. There are easier ways to earn eight percent returns than by investing in risky ventures that may completely fail.
Owning equity in the company, of course, allows the venture capitalist a chance to share in both the risks and rewards of the start-up company. In theory, as an equity holder, the capitalist risks losing his investment if the company busts, but shares the potential reward with all other shareholders if the company succeeds.
The disadvantages to being an equity holder are, as you may guess, the converse to the advantages of lending shown above.
1. Security. If the company goes bust, an equity holder is the last in line to get paid from the remaining company assets (and usually, there are none by that time).
2. Protection and Control. As a pure equity holder, the capitalist will have less chance to exert control over the company, and stands a higher chance of being susceptible to abuse by the majority shareholders.
What then is the best approach? There is no solution that fits all, but a typical venture capital deal will try to combine the two approaches: that is, the venture capitalist's money is treated in part, like a loan, but also provides the capitalist an ownership interest in the company. The following are some of the provisions that may be found in this approach:
1. Typical loan provisions, that provide a promise to repay (a promissory note), as well as some sort of security (for example, a lien on company assets).
2. Restrictions that the company cannot take certain actions (selling all of its equipment, for example) while the loan is still outstanding.
3. Sometimes, a provision that, at a given time, part or all of the loan is converted into stock.
4. A certain amount of stock ownership.
5. A guaranteed director or number of directors on the company's board.
6. A shareholder agreement that the company may not issue additional stock without the venture capitalist's approval.
7. A provision that provides the start-up owners the right to buy out the venture capitalist or, conversely, a provision giving the venture capitalist the right to force his stock to be bought.
If you have questions about engaging in a venture capital agreement in North Carolina, please contact me for an appointment at wldeaton@ppd-law.com
Sabtu, 23 Agustus 2008
Venture Capital, Part I
A client came to me last week with the opportunity to be a venture capital investor in a small start-up company. He knew how much he wanted to invest, had some clear ideas about what he wanted back out of the company, and then left it to me to prepare a venture capital agreement.
Venture Capital is simply a term for money obtained by a company that needs to change its position. Perhaps that position is that it needs to actually get started ("start-up capital"). Perhaps the company is on the verge of collapse. Often, as in this case, an already-existing company needs additional money in order for it to successfully grow in order to keep up with its new business.
Often, the business can raise money by debt--that is, by borrowing money (either from a bank or from private lenders). But borrowing, however, is tied in with risk--and most lenders do not want an exceedingly risky loan. If a business is brand new, or is getting ready to expand or change direction, there may be certain risks involved such that a traditional lender is unwilling to take the loan risk, considering that its return would likely be somewhere between six and ten percent per year.
On the other hand, there are investors who may be willing to invest their money or capital in riskier propositions--if they believe the risk will be appropriately rewarded. These are venture capitalists. These investors quite often will infuse money into a company that may have more risk, in return for the possibility of greater reward. In the next few blog posts, I'm going to discuss items to consider if you're asked to invest capital into a small or start-up company. But for today, the major considerations are as follows:
1. Debt versus Equity: Is your investment going to be treated like a loan, like ownership in the company, or like a mixture of the two?
2. Period of the investment: Is this open-ended, or do you want a specific time-frame in which your investment return should be realized?
3. Control: What rights of control will you have in the company?
4. Operation of the Company: What can the company do with your money? How much can the owners pay themselves?
Hopefully, this discussion will help both potential investors, as well as company owners looking to find investors.
Venture Capital is simply a term for money obtained by a company that needs to change its position. Perhaps that position is that it needs to actually get started ("start-up capital"). Perhaps the company is on the verge of collapse. Often, as in this case, an already-existing company needs additional money in order for it to successfully grow in order to keep up with its new business.
Often, the business can raise money by debt--that is, by borrowing money (either from a bank or from private lenders). But borrowing, however, is tied in with risk--and most lenders do not want an exceedingly risky loan. If a business is brand new, or is getting ready to expand or change direction, there may be certain risks involved such that a traditional lender is unwilling to take the loan risk, considering that its return would likely be somewhere between six and ten percent per year.
On the other hand, there are investors who may be willing to invest their money or capital in riskier propositions--if they believe the risk will be appropriately rewarded. These are venture capitalists. These investors quite often will infuse money into a company that may have more risk, in return for the possibility of greater reward. In the next few blog posts, I'm going to discuss items to consider if you're asked to invest capital into a small or start-up company. But for today, the major considerations are as follows:
1. Debt versus Equity: Is your investment going to be treated like a loan, like ownership in the company, or like a mixture of the two?
2. Period of the investment: Is this open-ended, or do you want a specific time-frame in which your investment return should be realized?
3. Control: What rights of control will you have in the company?
4. Operation of the Company: What can the company do with your money? How much can the owners pay themselves?
Hopefully, this discussion will help both potential investors, as well as company owners looking to find investors.
Minggu, 17 Agustus 2008
Common Reader Questions Regarding Partnership Disputes
I got some reader questions this week. While I normally don't respond (it's not that I don't want to help, but I don't like giving advice to someone whose laws may be different), I thought I could perhaps give general advice to situations like these.
I will caveat that my law license is limited to just North Carolina. However, I hope to give some general principles that can help:
"I just recently opened up a company but the amount of problems and arguments that I am having with my business partner is unbelievable. We are always arguing, during working hours she will just sit there going on about things that are not even necessary, wasting time and money and she will complain over the smallest thing. She has asked me to buy her out but she wants way more money than she actually put in to opening the company--which I am not agreeing to. The company has not even made that amount of money as yet so I don't know what to do. I can not work with the lady anymore ,its come to a stage where I don't even want to work myself but its my company so I am going to have to find a solution to this matter SO CAN I PLEASE GET SOME ADVICE ON WHAT TO DO?"
Unfortunately, your problem is one of the most common. You've not told me whether you are equal partners, or whether there is some unequal distribution of ownership. You've also not told me if your contributions were equal and in-kind (i.e., did you each put in the same amount of money? Or is she putting in money, and you're putting in sweat-equity?). Finally, you've not said if you have a written agreement (though I guess not).
Knowing so little about your situation, at least let me throw an idea your way that I talked about in my last blog: offer a buy/sell deal (see previous blog entry from July 26).
In other words: go to your partner, let her know that you appreciate things need to be resolved one way or another. Then make the offer I discussed in my last blog, and put the ball back in your partner's court.
1. Tell her that one partner should by the other out.
2. Tell her that you'll give her the choice: either you can set the value for the whole business, and then she can decide whether she wants to buy or sell at that value; or she can set the value, and you get to decide whether to buy or sell.
This works even if you're not equal partners (e.g., if you're 60/40, for example, the value would be set at the price for the whole company (assume your partner set value as $100,000), and then you'd decide whether to buy the partner out for $40,000, or sell to her for $60,000.
Here's the good thing that I gathered from your scenario: you're early on in this business relationship. What would be more difficult is if, three years from now, you were wildly successful (no thanks to your partner), and she wanted to be bought out--in essence, getting paid for the equity you created in the company. At this stage, however, you've not turned a profit yet. Also, you know she wants out. Most likely, if she has any sense, she'll let you choose the price of the company. Be sensible, and don't go too low, or she may buy you out. If, however, she wants to set the price of the company--then let her. After all, if she really does think it's worth so much, she may make you an offer that will financially reward you!
Hope this helps.
Here is one very similar:
"Hi Wesley.
A scenario for you:
My partner came up to me and said it would be a good idea to open a shop in
the area [certain medical equipment]. I agreed.
So I found the location, came up with the business name, discussed things
with real estate agents, distributers, employed staff etc etc.
My partner has done minimal work, much to my frustration.
Thus we have decided that one should buy the other out due to this and
we cant see eye to eye on decisions.
We have a lease for 18 months.
The shop isn't open yet and therefore no stock purchased.
We have put in $X each.
Does one just pay the other that $X back?
Do we get more than that from the other because I did more than my partner
or that it was his initial instigation not mine?
Does this count at all?
Do we just work out a number randomly?"
Ok, lots of good questions here. First, my usual disclaimer is that your jurisdiction (while another common law country) is not the same as mine, so remember that my free advice MAY be just worth what you've paid for it!
That being said, let me take care of the biggest question: since you're equal owners, unless your courts are different than ours, you'll be unlikely to get paid more for your share than your partner's. Sorry. The good news though, is, like the other reader, you didn't get too far into the relationship before realizing its inequalities.
I'm going to give you very similar advice to what I gave the other reader, with a few additional opening questions:
1. First, are you enjoying this business? I.e., would you want to continue it if you could buy your partner out?
2. Second, can you afford to continue the business?
It sounds to me as if, now that the ball is rolling, you'd like to try and make a go at it if you could.
3. Is it more likely that your partner would just like to be bought out and leave?
If so, offering your partner his initial start-up money might buy him out.
If you're not sure as to question number 3, then you might want to make your partner the offer I suggested to the first reader:
Offer them a buy/sell workout. One of you sets the price, the other gets to choose whether to buy or sell at that price. In my mind, the best thing in the world that could happen to you (or the reader above) is that your partner would want to set the price. In such situations, the partner (who truly wants to be bought out anyway), could set the price so high in their greed that you'd rather take a buyout, and start a new business.
But considering that your partner will be scared of this happening, he'll most likely ask you to make the price. Unfortunately, then, you've got a hard decision. Probably, in your mind there's one price you think HE should be bought out at (a low price), and a different price that YOU'D be content with being bought out at (the high price). The buy/sell price you make, will likely need to be somewhere in between.
The best advice I can give you for the price you set is not really legal advice--it's more practical. Set a price, and then make yourself comfortable--before offering it--that, come what may, you'll be happy with the results. Think of all the benefits you'll get if you can buy your partner out. But then think of the freedom you'll have if your partner buys you out and you go your own way (perhaps you can start your own business now, or take a regular job with shorter hours, etc.).
Finally, there is a legal consideration. As part of this buy/sell deal that I suggest you offer your client, you need to agree, as part of the deal (before either of you makes a decision), that the BUYING partner will take over the lease and all partnership obligations and indemnify the SELLING partner from any liability therefrom. Even better, if at all feasible, see if the landlord will be willing to release the SELLING partner from the lease's liability (I'd say chances are against it, but at least try).
It's only fair to the selling partner that he (or you) not have to worry about any partnership liabilities creeping back in the next 18 months.
For both of the individuals above, I'd suggest that if your disgruntled partner takes you up on the offer, that you then hire a qualified attorney/solicitor to draw up the paperwork. I'll be happy to recommend someone in your area if you desire. And please, let me know how things turn out!
I will caveat that my law license is limited to just North Carolina. However, I hope to give some general principles that can help:
"I just recently opened up a company but the amount of problems and arguments that I am having with my business partner is unbelievable. We are always arguing, during working hours she will just sit there going on about things that are not even necessary, wasting time and money and she will complain over the smallest thing. She has asked me to buy her out but she wants way more money than she actually put in to opening the company--which I am not agreeing to. The company has not even made that amount of money as yet so I don't know what to do. I can not work with the lady anymore ,its come to a stage where I don't even want to work myself but its my company so I am going to have to find a solution to this matter SO CAN I PLEASE GET SOME ADVICE ON WHAT TO DO?"
Unfortunately, your problem is one of the most common. You've not told me whether you are equal partners, or whether there is some unequal distribution of ownership. You've also not told me if your contributions were equal and in-kind (i.e., did you each put in the same amount of money? Or is she putting in money, and you're putting in sweat-equity?). Finally, you've not said if you have a written agreement (though I guess not).
Knowing so little about your situation, at least let me throw an idea your way that I talked about in my last blog: offer a buy/sell deal (see previous blog entry from July 26).
In other words: go to your partner, let her know that you appreciate things need to be resolved one way or another. Then make the offer I discussed in my last blog, and put the ball back in your partner's court.
1. Tell her that one partner should by the other out.
2. Tell her that you'll give her the choice: either you can set the value for the whole business, and then she can decide whether she wants to buy or sell at that value; or she can set the value, and you get to decide whether to buy or sell.
This works even if you're not equal partners (e.g., if you're 60/40, for example, the value would be set at the price for the whole company (assume your partner set value as $100,000), and then you'd decide whether to buy the partner out for $40,000, or sell to her for $60,000.
Here's the good thing that I gathered from your scenario: you're early on in this business relationship. What would be more difficult is if, three years from now, you were wildly successful (no thanks to your partner), and she wanted to be bought out--in essence, getting paid for the equity you created in the company. At this stage, however, you've not turned a profit yet. Also, you know she wants out. Most likely, if she has any sense, she'll let you choose the price of the company. Be sensible, and don't go too low, or she may buy you out. If, however, she wants to set the price of the company--then let her. After all, if she really does think it's worth so much, she may make you an offer that will financially reward you!
Hope this helps.
Here is one very similar:
"Hi Wesley.
A scenario for you:
My partner came up to me and said it would be a good idea to open a shop in
the area [certain medical equipment]. I agreed.
So I found the location, came up with the business name, discussed things
with real estate agents, distributers, employed staff etc etc.
My partner has done minimal work, much to my frustration.
Thus we have decided that one should buy the other out due to this and
we cant see eye to eye on decisions.
We have a lease for 18 months.
The shop isn't open yet and therefore no stock purchased.
We have put in $X each.
Does one just pay the other that $X back?
Do we get more than that from the other because I did more than my partner
or that it was his initial instigation not mine?
Does this count at all?
Do we just work out a number randomly?"
Ok, lots of good questions here. First, my usual disclaimer is that your jurisdiction (while another common law country) is not the same as mine, so remember that my free advice MAY be just worth what you've paid for it!
That being said, let me take care of the biggest question: since you're equal owners, unless your courts are different than ours, you'll be unlikely to get paid more for your share than your partner's. Sorry. The good news though, is, like the other reader, you didn't get too far into the relationship before realizing its inequalities.
I'm going to give you very similar advice to what I gave the other reader, with a few additional opening questions:
1. First, are you enjoying this business? I.e., would you want to continue it if you could buy your partner out?
2. Second, can you afford to continue the business?
It sounds to me as if, now that the ball is rolling, you'd like to try and make a go at it if you could.
3. Is it more likely that your partner would just like to be bought out and leave?
If so, offering your partner his initial start-up money might buy him out.
If you're not sure as to question number 3, then you might want to make your partner the offer I suggested to the first reader:
Offer them a buy/sell workout. One of you sets the price, the other gets to choose whether to buy or sell at that price. In my mind, the best thing in the world that could happen to you (or the reader above) is that your partner would want to set the price. In such situations, the partner (who truly wants to be bought out anyway), could set the price so high in their greed that you'd rather take a buyout, and start a new business.
But considering that your partner will be scared of this happening, he'll most likely ask you to make the price. Unfortunately, then, you've got a hard decision. Probably, in your mind there's one price you think HE should be bought out at (a low price), and a different price that YOU'D be content with being bought out at (the high price). The buy/sell price you make, will likely need to be somewhere in between.
The best advice I can give you for the price you set is not really legal advice--it's more practical. Set a price, and then make yourself comfortable--before offering it--that, come what may, you'll be happy with the results. Think of all the benefits you'll get if you can buy your partner out. But then think of the freedom you'll have if your partner buys you out and you go your own way (perhaps you can start your own business now, or take a regular job with shorter hours, etc.).
Finally, there is a legal consideration. As part of this buy/sell deal that I suggest you offer your client, you need to agree, as part of the deal (before either of you makes a decision), that the BUYING partner will take over the lease and all partnership obligations and indemnify the SELLING partner from any liability therefrom. Even better, if at all feasible, see if the landlord will be willing to release the SELLING partner from the lease's liability (I'd say chances are against it, but at least try).
It's only fair to the selling partner that he (or you) not have to worry about any partnership liabilities creeping back in the next 18 months.
For both of the individuals above, I'd suggest that if your disgruntled partner takes you up on the offer, that you then hire a qualified attorney/solicitor to draw up the paperwork. I'll be happy to recommend someone in your area if you desire. And please, let me know how things turn out!
Sabtu, 26 Juli 2008
The easiest and fairest way to resolve a partnership dispute
If you read my posts regularly, you know that in my business practice I run across business ventures in which--for whatever reason--the owners no longer have the same goals. Sometimes, they outright dislike each other, in others, they simply want to do different things. Sometimes these differences involve LLCs, corporations or true partnerships (and here, I'll refer generically to the co-owners as "partners").
Hopefully, a good organizational agreement will provide for a way to resolve these disputes between partners, but, as you have seen in previous posts, they don't always.
What I'm going to provide you today is the easiest, fairest, most common sense way to resolve a dispute between two partners over the direction of the business. First, however, a few caveats:
1. You'll need to have your finances in order.
2. You'll need to understand the possible ramifications that will result from this method.
3. You'll need to prepare yourself to be satisifed with whichever result occurs.
Those warnings are cryptic, aren't they?
Here it is, then: If you and you partner are at odds, or are wanting to go in different directions and can't resolve your differences, meet with your partner, and make him this offer (and for this example, I'm assuming two partners who are equal owners).
1. You think that the partnership between the two of you is going in different directions.
2. The best thing for everyone is if one partner buys the other one out.
3. One partner should set a value for the business (i.e., what that partner thinks the partnership, or at least his half of it, is worth).
4. The other partner then gets to decide whether to sell at that price, or to buy at that price.
5. You give him the option to decide whether he wants to set the price, or whether he'd rather decide whether to buy or sell.
6. You wait.
Think about how absolutely, finally, quickly and fairly this can effect a business buyout and a resolution of the dispute--whether you're running a lucrative partnership or one that is barely struggling along.
I was involved with a buyout, recently, where this occurred. One partner decided to make this offer to the other. Before he made the offer, he searched his soul, and made a decision at what value he'd place on a partnership interest. Then he determined that he'd be happy either way--if he got bought at for that price, he could live with it, or if he was asked to buy the partner out at that price, he'd live with it.
He then approached his partner, and made the suggestion for a buy/sell. The other partner agreed. Now, think about how easy things become at this point: My client had already decided his value point. If the other partner decided to set the value, my client could make his buy/sell decision in about 30 seconds, simply based on whether the offer was higher or lower than my client's buy/sell point he had already mentally set.
Or if (as was the case in this instance) the partner asked my client to set the price, my client could offer the price he'd already decided, and then sit back and wait for the partner to make the decision of whether to buy or to be bought out.
The two hardest parts about this mechanism are (1) coming up with a value that you can live with whether you buy or sell and (2) convincing the other partner to do this (for example, perhaps the other partner would only want to sell, or would only want to buy, etc.). But once the other partner agrees to this mechanism, the buyout will be fair.
In my client's case, if his partner had thought the price offered was too low, then the partner had the right to buy my client out at that low price. If he thought the price was unrealistically high, then he could sell out to my client at that price. Conversely, my client had to be realistic about the price. Perhaps he would've liked to have sold for a higher price, or to have bought out his partner for a lower price, but since he did not know which choice his partner would make, he had to make a price that he could live with either way.
If you have any more questions about partnership issues in North Carolina, feel free to schedule an appointment at 704-735-0483.
Hopefully, a good organizational agreement will provide for a way to resolve these disputes between partners, but, as you have seen in previous posts, they don't always.
What I'm going to provide you today is the easiest, fairest, most common sense way to resolve a dispute between two partners over the direction of the business. First, however, a few caveats:
1. You'll need to have your finances in order.
2. You'll need to understand the possible ramifications that will result from this method.
3. You'll need to prepare yourself to be satisifed with whichever result occurs.
Those warnings are cryptic, aren't they?
Here it is, then: If you and you partner are at odds, or are wanting to go in different directions and can't resolve your differences, meet with your partner, and make him this offer (and for this example, I'm assuming two partners who are equal owners).
1. You think that the partnership between the two of you is going in different directions.
2. The best thing for everyone is if one partner buys the other one out.
3. One partner should set a value for the business (i.e., what that partner thinks the partnership, or at least his half of it, is worth).
4. The other partner then gets to decide whether to sell at that price, or to buy at that price.
5. You give him the option to decide whether he wants to set the price, or whether he'd rather decide whether to buy or sell.
6. You wait.
Think about how absolutely, finally, quickly and fairly this can effect a business buyout and a resolution of the dispute--whether you're running a lucrative partnership or one that is barely struggling along.
I was involved with a buyout, recently, where this occurred. One partner decided to make this offer to the other. Before he made the offer, he searched his soul, and made a decision at what value he'd place on a partnership interest. Then he determined that he'd be happy either way--if he got bought at for that price, he could live with it, or if he was asked to buy the partner out at that price, he'd live with it.
He then approached his partner, and made the suggestion for a buy/sell. The other partner agreed. Now, think about how easy things become at this point: My client had already decided his value point. If the other partner decided to set the value, my client could make his buy/sell decision in about 30 seconds, simply based on whether the offer was higher or lower than my client's buy/sell point he had already mentally set.
Or if (as was the case in this instance) the partner asked my client to set the price, my client could offer the price he'd already decided, and then sit back and wait for the partner to make the decision of whether to buy or to be bought out.
The two hardest parts about this mechanism are (1) coming up with a value that you can live with whether you buy or sell and (2) convincing the other partner to do this (for example, perhaps the other partner would only want to sell, or would only want to buy, etc.). But once the other partner agrees to this mechanism, the buyout will be fair.
In my client's case, if his partner had thought the price offered was too low, then the partner had the right to buy my client out at that low price. If he thought the price was unrealistically high, then he could sell out to my client at that price. Conversely, my client had to be realistic about the price. Perhaps he would've liked to have sold for a higher price, or to have bought out his partner for a lower price, but since he did not know which choice his partner would make, he had to make a price that he could live with either way.
If you have any more questions about partnership issues in North Carolina, feel free to schedule an appointment at 704-735-0483.
Sabtu, 12 Juli 2008
Limited Liability Company Buyouts
A client and his wife came in a few weeks ago with some questions. He, his wife, and another couple had formed an LLC for a new business venture. Each member owned 25 percent. The venture was still fairly new, though experiencing some apparent success already, when one of the two couples decided it wanted out. My clients, who wanted to keep the business going, came to me for some counsel about what to do.
Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.
The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.
Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.
The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:
1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or
2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.
Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.
Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.
The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.
Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.
The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:
1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or
2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.
Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.
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