Spliting a partner without an operating agreement


1

I have been in the retail industry for over 14 years. I pitched an idea to an old friend of mine to open a mattress store about two years ago. We opened the company as an LLC. I had all the connections to get the products, found the location that we are using and did all the start up work behind the scenes while working at a full time job. He put in the initial start up funds.

In short - I did all the work to get the business off the ground. He was a general contractor and never was in retail. He was supposed to barter out some work with a lawyer in return for an operating agreement, but he took money instead of getting us an operating agreement.

I have now seen that I married into the wrong partnership. He is verbally abusive and threatens me when he gets upset. He does not take any form of criticism without blowing up and wanting to fight. I now know that he acts like this towards not only me but everyone he comes in contact with on a daily basis.

We are 50/50 in the business and both have put in money since we have been open and both have taken money out as if it were a personal bank account. We have no accountant and I do the books. The problem that I'm facing is that I don't want to lose the business that I have branded and put my name on the line for, but he over estimates the worth of the company and his buy out is absurd.

He thinks the business is worth well over $100k but we average only $15-$20k a month in sales at a 40% gross before taxes. Our overhead is around $5-$6k a month depending on advertising. I can disassociate from the llc and let him run it in the ground, but I hate to tarnish my name and the brand I basically myself.

Of course there are two sides to the story but this guy is the worse partner ever. He comes in late, takes off once or twice a week because someone is always sick at home. He depends on me to pay the bills, order the trucks, keep track of sales etc...

I understand that I made a mistake of picking a partner that doesn't seem to care as much as I do, and not doing an operating agreement. Any ideas?

LLC Retail

asked Apr 3 '13 at 10:26
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Jay
6 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans

4 Answers


2

  1. You didn't mention what state you formed your LLC in. When there isn't an operating agreement, your state's LLC act will put in a bunch of default provisions, including rules on dissolution and withdrawal. That's the first place to look since it tells you what's going to happen if you and he don't agree on what to do.
  2. If his estimate of the value of the business is high, then you might offer to let him buy out your half at his valuation.
answered Apr 4 '13 at 01:01
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Chris Fulmer
2,849 points
  • Option 2 is definitely the way to go. If he is being unreasonable and you can't work with him, then you need to leave and his valuation must be fair to him, so let him buy your out. – Gary E 7 years ago

1

Firstly, I'm not a lawyer, nor am I an accountant so you will have to work on the detail with them.

You have a few issues but it can be resolved.

Valuing a business. The $100K isn't totally unreasonable, possibly on the high side but you can take it to an independent valuer to get a real number. Rule of thumb is 2 years gross revenue + stock. You would then be buying out 50% of that through a bank loan.

Buyout problem. Your real issue seems to be that you feel this guy is more hassle than he is worth so if you don't have him around every day your ahead.

If you can't get the cash upfront to buy him out, you could offer to make him a silent partner while you buy him out. Basically you offer to pay him out, at roughly his current wage per month until the agreed buyout figure is hit. You can then manage your cashflow during that time and not have the headaches you do now.

This is probably the easiest way if you sell it to him well.

My pitch would be : He doesn't have to work, still gets an income for 9 to 12 months. He can have a holiday or if he gets a new job he will be earning double for the year.

That way you create a win / win for both parties and your most likely path out of your situation.

answered Apr 4 '13 at 15:27
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Robin Vessey
8,394 points

1

Well - If he thinks that the business is worth 100K then call his bluff - have him buy your 1/2 of the share @ 50K. When he balks, then ask what he thinks is reasonable. When he answers with a reasonable amount, then say - okay, I'll be happy to buy you out at that price as well.

Migrate the discussion into that the business will not survive the way it currently operates, and either one of us leaves with the promise of a cash out of we close and both lose.

answered Apr 4 '13 at 01:02
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Jim Galley
9,952 points

-3

I think you should let him try to buy you out. If he continues his belligerent ways, just go use the money he gives you (plus some loan money) to start his competitor, and run him straight out of business and into the ground.

However, without getting overtly vehement & vengeful here, I think you should probably do a personality test on yourself and all future business partners.

I myself, on separate occasions, nearly went into business with poor-match partners; I'm ultimately doing a Michigan LLC (also with default state-law privisions & no O.A. - but then again I'm a single person-operator LLC so that is slightly different) involved in community mercantile work (i.e. "nation building" on a city level), and since I don't have to deal with raucous and possibly cruel mismatched business partners, I can focus the 100% of the time I have as freetime, on my merchant business.

I suggest, if you are willing and think you have the courage, to try being a single-operator business and competing him out of the industry.

You can still hire employees (and you should, at a point).

answered Apr 4 '13 at 06:17
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Nathan Zhang
1 point

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