Have Serious Issue W/ Business Partner........

asphaltgambler · 02-25-2010, 08:15 AM

............. Need some real qualified advice on this matter. Readers Digest version:

Small Auto repair business in Va. - sole proprietor / owner hires me as a shop foreman/manager/tech in July '08 - with the idea that he also is willing to sell a portion to me at a discount.

He had his @ss in a bind and to some degree admited it. As a veteran of the auto business I recognized that there wasn't one aspect of his business that did not need guidance.

He offered X amount per job + X amount per shop total, X amount of new clients that I brought in, etc, etc. He also wanted about $140 large for an equal share. No way was I buying that crap and in a nice way told him as much.

I counter-offered with no money upfront, and "gave back" the top tier of his offer in exchange for 10% ownership/net profit for each year that I work for up to 49% at the end of the fifth year. It would also exclude me from any debt he or the shop was or had accrued.

He aggreed and we composed a simple document that says exactly that and had it notorized. He has since come down with amneisha (sp?)

At the time of negotiation He forgot to tell me that there was so little net profit the he could/does not pay himself a salary - He skims about $250 a week off the top.

On the profit/loss statement he has decided to pay himself a salary just past the net income so that there is 'negative' profit. OK so he got me.

THE QUESTION IS: Can I force him to buy me out? If I leave can I file judgement against the business to protect myself from a future sale of the business w/o me being aware ? This July my will be the second year anniversary.= 20%

s_morrison57 · 02-25-2010, 08:21 AM

sounds like his accountant is talking through him, never ever have a business partner who is an accountant

legion · 02-25-2010, 08:23 AM

I highly doubt that you can do anything effective against this guy.

But you can walk away and leave him to run the business himself.

McLovin · 02-25-2010, 08:39 AM

Ah, the old "% of net profit" trap.

I don't really understand your facts, though.

It sounds like he wanted you to pay "buy in" money ($140K), but ultimately you negotiated a deal where you didn't pay any "buy in" money.

And, "10% ownership/net profit" isn't clear. Were you supposed to be paid 10% of the net profit, or were you supposed to be given an equity interest in the business?

But ultimately it sounds like you believe under your agreement you will have a 20% equity interest in the business.

Can you post a copy of the agreement, or type in exactly what it says? That would help to give an idea.

McLovin · 08:48 AM

But, the bottom line is, if some kind of partnership (or other entity) has been legally formed, in which you are a 20% partner/owner, yes, there are legal remedies wherein you can force a dissolution and payout to you (to the extent the business has any value, 20% of a non-profitable business isn't worth anything).

One issue to figure out, initially, under your state law is whether you can recover attys fees if you prevail in such a dissolution action (and whether the guy has the ability to pay them, which sounds highly doubtful).

Another issue is whether it's worth the time and money to pursue him. You would def. need a lawyer to file this suit. That is going to cost thousands. Ultimately your scenario is you've spent a lot of money to become the 20% owner of a business that isn't profitable, or may not even exist at the time you get the case resolved.

Another issue to be careful for is "be careful for what you wish for." Generally, partners or equity holders are all liable for the debts of the enterprise.

911Freak · 02-25-2010, 08:46 AM

Did you look at the books prior to entering into this agreement?

Not busting your chops here, just wonder if you were shown 2 different sets of numbers etc.

Did he not represent the business as net profitable, how did he justify the 140k?

Sounds like he knowingly mislead you considering he was looking for 140K and the shop does not turn a net profit!

More info please

asphaltgambler · 02-25-2010, 09:36 AM

To answer: The agreement states very simply that in exchange for hard work and dedication I will receive 10% ownership / 10% net profit each year I am there. for a total of 49% by the end of the fifth. It does not specify partnership or other-wise

Seven years ago he bought the business for $450k which was generating $1.1 million in total sales - @$190K net profit.

My first year in tenure $665K gross sales and $5k negative. There are many reasons for the decline, mostly mis-managemnt. theft, poor customer retention, etc

When we were in "discussions" he valued the business at @$300K based on sales of that year. I did not look at the books. I did ask his 'accountant' - turned out he was banging her - I did not know it at the time.

Only well after working here that I was able to pull out of him that he owes almost $250K to his family for purchase of the business - there is no direct connection from that debt directly to the business.

He smoked a $60K credit line to start a sales outlet up the street but it failed......which by the way he didn't legally seperate the two so that debt is upon the current business

McLovin · 02-25-2010, 09:51 AM

Quick and rough look, it seems like this is a business with negative equity and little or no profitability, that is likely going to eventually go down. Doesn't seem like there is a lot there worth fighting over (much less fighting over a 20% interest in).

Also, seems like this business was a disaster for him. If he paid $450K for it 7 years ago, it looks like he's been working the past 7 years for nothing.

Sometimes, you make a mistake for which you have to pay a price. Your mistakes (and there were a few, the primary one was hooking your wagon to a sinking ship) appear to have occurred 2 years ago. Sometimes it's best to just accept that mistakes were made, cut your losses and move on.

Your initial post asked about legal rights. Again, yes, you can file an action to get a declaration of your ownership interest, force a dissolution, etc. My sense is that that is not going to be fruitful and will ultimately cost you more than it gains you. But that's a decision you'd have to make.

You might try just negotiating with him to buy out your "20% interest," see if you can get him to offer anything, and just take the best you can get from him.

Dueller · 09:59 AM

With all due respect I have two words for you: Due Diligence. You didn't do it.

Fortunately you haven't poured any cash into the business out of your pocket.

Unfortunately you don't have a whole lot in return. 20% of an apparently non-profitable business. Even if you had ridden it out for 5 years you would have at best a non-controlling interest in a non-profitable business. You do/did have the warm fuzzies that you were a part "owner."

Just out of curiosity, was agreement with this "ownership" of the business just the business or did it include assets (such as land, buildings, equipment, tools) of the business? And how did it address liabilities of the business? Depending on the type of partnership, you could be on the hook for part or in some cases all of the partnership liabilities (perhaps with or without recourse)...that's probably a remote possibility but it may exist and may be his trump card in negotiating the value of your interest.

Sounds like you entered into this quagmire without spending a few bucks to have a CPA or attorney look at it...may come back to bite you. Can't tell you how many times I've been brought in after the fact to straighten out such friendly handshake deals.

McLovin · 02-25-2010, 10:07 AM

That is true. If this were a corporation, and you became a 20% shareholder, that would be one thing as far as being personally liable.

But, since this was a sole proprietorship, your involvement with it is going to be in the nature of some kind of partnership or joint venture. Your liability for debts in that case is possible.

If I were you, I think I'd be happy to get an agreement where he pays you $5K, you get bought out and are no longer any kind of partner or joint venturer, and you get a release of all liabilities (to the max extent possible).

It's one thing to have worked for a year and a half for little or nothing, in a biz venture you put no money into, and simply walk away. It's another thing to do that, but also have creditors (like on the $60K line) coming after you as a partner of the business.

asphaltgambler · 02-25-2010, 10:23 AM

I hear all of you......very good advice. Thanks.

At the time I was getting shafted by a small BMW/Porsche dealership. The job before that ..............same deal when the economy hit the skids. I'm a technician. My pay is based soley on production. No worky- no eaty . It's tough business even when it's ..........."good"

I wanted an opportunity and needed to move on from the previous dealer. I needed to eat.
There were only 3 postions at the time open in my commuting area. This I thought was the best ....................

Actually it was the best choise then. The first one I had a contact inside that looked good and the business 'appeared' in good shape. 6 months later that business started to hit the skids and she was let go. Business "B" had a bad reputation and ownd by some shady middle-easterners. They needed someone with my exprience to lead the shop.

I did some checking with local vendors and this place seemed and was the best ........or maybe the least worst choice.

I guess the worst part is I have tons of time, energy, effort in turning the place around. Dueller was right - shame on me ( and I know better) for not looking into his books more thoroughly

john70t · 02-25-2010, 10:51 AM

In order to get out of this, you might need some leverage.
Research quietly.
As a preliminary, try obtaining past tax records, corporate business filings, past account histories, etc.. and see where the numbers and/or written statements don't match up. Start from the initial portfolio documents he gave you as a prospective partner.

I don't know what specific local rights you have as a partner, but all those should be available to a registered partner. If you're not registered, you might be able to walk away, but always CYA.

Lot of work, but it could free you from a lot more future liability. Bad situation made worse by a lack of documentation and review.

Rot 911 · 02-25-2010, 10:56 AM

Like the other attorneys have stated, I would be more concerned with your potential liability right now than your percentage of profits.

ODDJOB UNO · ODDJOB UNO's Garage

i would build a WALL(after surveying and documenting survey) (1) foot in on your property line and just wait until he decided to paint it baby POO YELLOW..........

and THEN NAIL HIM BETWICKT HIS EYES with a RESTRAINING ORDER! LOL!

seriously............i would go to an attorney. i would set an appointment for your first free hour of consultation. and i would TALK DAMN FAST leaving out ANY and ALL "he said-she said" crap and lay it on the line and explain your concerns and what possible remedies..........legally that choo may have.

and thats why gawd made lawyers.................to rid the planet of "SQUIRRALS!"

asphaltgambler · 02-25-2010, 01:16 PM

I forgot to mention that there is no real estate assc. with this business. He has recently renewed the lease for another 5 years. I pressured him to get an appraisal to verify what the current market adjustment should be before he signed the new lease.

Commercial rents are way down in our area - lots of vacant space. We are close to but not in a high traffic area. We HAD leverage I believe over the landland (private owner) becuase the facilty is really purpose built for this industry only. Would take quite an investment to convert to retail.

He failed to capitalize on the situation and signed the same deal again...........................@ss hat