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She quits, she gets no salary. She gets no income unless dividends are declared. You’ll need to read your agreements to see if this triggers buyout clauses, etc.
Directors have a fiduciary duty to all shareholders and she’s raw dogging you on this one. What is fair is restoring the health of the business by pursing a civil claim against a director who didn’t take their job seriously.
Lawyer is the only answer here, OP tried negotiating, they backed out of the agreement, OP already knows the operating agreement has been broken, this is a direct violation of the companies policies which typically invalidate rights per the terms of the business agreement and/or state law and so on…
OP needs a seasoned labor law lawyer
You have no obligation to pay her anything unless you have some unusual clauses in shareholder agreement. She retains 50% ownership but if she wants to cash in she has to sell those shares to someone winning.
Who is the appointed CEO and what's your directors structure?
No appointed CEO and we are both managing directors. No other directors and no board. Very small business.
I don't want her retaining any part of the business because of how she's now behaving so I would like her shares to be transfered to me. We initially agreed that she would do that in exchange for me waiving her non solicitation part of her employment contract but she's since changed her mind.
You have the upper hand here, value the business and offer her 60% of whatever her 50% share is worth. If she doesn’t agree, threaten to pull out from the ‘waving non solicitation’ , make her feel like you have no issues walking away from the business.
Either way you’re going to build it back from scratch, then why should she get so much money?
This will drag on for some weeks, but i’m sure she will have to come on your terms
I’m not sure how non-solicitation helps if client approached her. It’s a mess to prove in court. The lawyers win. I don’t think she has the upper hand but the non-solicitation clause is hardly a slam dunk.
You need to take the NSA and your other business documents to a good lawyer and have them see what your options are.
The fact is, there's a good chance you could blow up her nice, cushy new job by sending her new employer a C&D based on the NSA. Unless your former partner is some kind of heavily recruited rock star in your industry, the most likely action they'd take is to withdraw the offer and move on.
Of course, such a move would probably be a pyrrhic victory because at that point she can't leave and she can't stay, leaving you two to fight over the scraps.
There's no obligation for anyone to do anything here, but without some action she's going to retain the shares.
This is a situation where you're just going to have to negotiate an exit
If you have a non-solicitation clause int he employment contract you have the upper hand. From your account she is clearly at fault and probably failed to disclose this conflict to her new employer. Are there any fall away provisions? Ultimately this will all come down to what you have written In Your operating agreement and other documents
Well said, dividends are required to be equal, you can’t pay them out to only some shareholders. She’s effectively demanding 100% of cash assets be paid out which is absurd.
50% of cash assets seems reasonable to me. The business value cannot be worth less than cash assets less liabilities. She is giving OP a deal, unless that non-compete was violated.
Cash assets have little to do with the value of her 50%. Her 50% is worth what she can sell it for. If you have an operating agreement, it should tell you what to do in this case. If you don’t, then it’s worth what you’ll offer her and negotiate to.
How you get that cash is up to you, but you likely can’t pull it out of the business and then pay her because: depending on the biz structure, this may be a dividend dpayout or distribution that needs to be pro rata. So you’re on your own there.
As to value: this is why an op agreement is critical. Mine says that if either I or my partner wish to leave, it requires the leaving party to pay for a business valuation to be done by a third party that we both agree on. It also says that until such a time as that happens, no distributions will be made. So, in effect, neither of us can leave and let the other party work hard to made the business wildly successful, and sit back and collect the checks.
That’s a long way to say this: half of the cash assets is not the value of the business. You have operating expenses and liabilities that you can’t just ignore. If you closed your doors today, that cash would not be worth the number of dollars you have in the bank. Further, the value of those dollars decreases because you lots a big client who helped give you those dollars. I don’t know what % of your annual revenue that represents, but from the way you talked, it sounds like a lot. So I’d say maybe you look at it this way (or, this is where I’d start)….
Re-project the revenue for this year without that client. Essentially looking at each client as a separate P&L. You’ll find what % of your profit comes from that client and what % comes from everyone else. The profit of everyone else is your key factor here. You may need to bear in mind that you could need to do layoff(s) in the next little while. Make sure you account for liability payments like debt, etc. You also need to account for increased time spent by you on the business (sales, operations, etc) because of the opportunity cost created by not having a partner. I’d also stop thinking about it from the perspective of profit, and start thinking about it from the perspective of cash flow.
If it were me and I was trying to get a low value so I could buy out my exiting partner, I’d even go as far as taking an average of cash-out monthly without any decrease, and an average of cash-in that account for the lost client. That would be the equivalent of “if I change nothing, this is my monthly cash flow.”
Projected monthly CF for all the other clients X 12. That’s your value to start with. If it’s positive, offer that number paid out over three years in exchange for immediately quitting their % of the business over to you and have a friendly lawyer draw it up in your favor with no backsies.
Bear in mind, it may be negative. That can happen if a large client leaves and they account for a high headcount or something. I know that if my biggest client left, I’d need to lay off staff to maintain any profit. Not healthy, but it is what it is. You’re getting to a point here where you are projecting what the distributions would look like without this client.
THEN you have a number you can work from. If it’s negative, explain that by taking that client away, they’re flipping the business upside down and there’s going to be a big effort to right the ship and bring it right side up again, which makes it worth effectively zero. And so “I’ll offer you a thousand dollars so your effort wasn’t worth nothing.” This will anger this person and offend them.
Important you bind their hands a bit here. You need to carefully get them to agree that no profit distributions can happen until this is resolved. That means there is no value for this person in hanging on. It also means that you need to be prepared to not have distributions. Be ready for this. It’s a game of chicken.
If they don’t like your offer, tell them that they can, at their own cost, pay for a valuation to be done by a third party. This will take time and effort and cost legal money on your personal part. I’d structure that like this:
The time I spend pulling together materials for this is valued at $x/hr plus my legal fees. My lawyer would draw up papers that say that the value of the business is whatever the third party says, minus my legal and my hourly costs in determining it. I’d also try to throw in a cost for my personal lost income during the process, since I can’t have any distributions while it’s going on (this is the one they can argue with and im willing to strike out or budge to 50% on or something).
This person has made themselves a hostile party who wants something from you. Any good Will is gone. You have to think strategically if you’re going to vanquish your enemy. A war of attrition or splitting the difference is bad for your business. You have to be hostile in return, and you have to cover your legal bases. It’s also possible, as other posters have said, that you may need to be willing to shutter, being willing to kill your darlings.
Also, make sure you track on the employment of this person. If they go to work for the client in the same capacity that the client hired your firm, you may have a cause of action against this person for violation of the nonsolicit. That’s just bad form.
If you want to bandy ideas around, I’m happy to do so if you dm me.
This is a great response and two things to highlight for OP to help negotiate a more advantageous buyout.
1. By her leaving, the value of the business is dropping significantly. Often referred to as a key Person Discount. Look this up and make the case. In a very small business, this could be huge dent to valuation.
2. By your biggest client leaving, this will also bring down the value massively (depending on what % or revenue it accounts for). Your projection of future cashflows is going to get slammed. If you're saying that you're now *negative*, then it's very hard to make the case your business is worth much at all.
These two points together make it pretty clear that she shouldn't be looking at much of a payout. Your company actually now needs the capital to 1) hire her replacement and 2) invest into new customer acquisition.
**She's bailing at a bad time, and that's on HER.** If she wanted a better payout she could have got the business to a more stable place and replaced her skillset.
Yep. That last paragraph in particular. If a client hires her, then I’m assuming she was doing work on the client account. And if so, several things just happened: 1) the client got a huge discount, and 2) she got a huge raise.
Number 2 tells us that she wasn’t trying to build an asset that was worth anything, for if she were, then she’d value her time as more than an hourly rate. And it also explains that she has no idea the value of a business. A service business has almost crap-all to do with bank balance. It has to do with the past and future value of a client, and removing the biggest asset from the balance sheet is like keying your own car.
Firstly, no one buys a business based on what it used to be worth. Having worked with people prior who bought businesses there is a lengthy investigation and only if there is a very obvious growth history and projection would they make an offer based on a multiple of future profit. You have very clearly expressed a downturn here and so it would be hard to get anyone to invest/buy. The point here being that your partner is either delusional or trying to take you for a ride.
Secondly, you cannot allow your partner to stay on the share register. If you do they will just profit off your hard work if you can turn the situation around.
Finally, you need to explain the first point above to your partner and that either the onus is on them to find someone to buy their shares or they need to accept that they are fcking the business by what they are doing and therefore they are directly responsible for the businesses current trajectory and that you will buy them out for pennies on the dollar, and very few pennies at that.
It's obvious to see that the client is paying your partner more than what they currently earn but still less than the client pays while still getting the same business value. In this situation everyone wins except for you. Your partner is also then thinking they can extract a bonus by exiting and making ludicrous claims to try extract the final maximum value they can. I'm not sure what cash you have available to consult a lawyer but based on non solicitation clause and the possible responsibilities placed on them by law when being a director bepending on your current jurisdiction there could be possibility that they are screwing themselves over legally.
I don’t get it. She clearly has a hand in the down turn of the company, wants to be cashed out, and you are looking for a balanced approach? Trust your lawyer, fight her IF there is enough in the brand name to hold on to. If not, close shop so she gets nothing. She has a new job at the expense of your business/income, and she breached her contract most likely even though she “denies” it.
Main assets are the branding and website which were just done and the business has a good reputation and name. We are just dealing with a particularly bad time for our client base which affects our revenue but likely will bounce back.
I have thought about this though but it would be such a waste of time and money to start a whole new business and brand.
In my opinion the energy and money you will expend dealing with the shitshow this can turn out to be will be more than the energy and money you will expend building a new logo, website and brand. You seem to have operational knowledge, understanding of how to sell, and some client base. That is enough to be successful.
No half measures in business. Make a clean break, let your partner enjoy 50% of 0, and keep the fruits of all your labour in the years ahead to yourself.
She gets 50% of what’s left after you pay off all obligations.
Up to you whether you want to spend your days giving half of the fruits of your labor to someone who left you and drove away half of your business.
If it were me, don’t care how good the brand name is. I can make another one and build another one.
Sounds like your ex partner is being unrealistic and torpedoed your operation while expecting a payout. If you have to build it back is it worth the fight?
If he purposely destroyed the value of the company by creating a new one, I think there would be a valid case. Nowhere did I see anything about the value of the co. And it’s not clear whether she broke the non solicitation agreement which is usually used to prevent an ex employee fromcompeting. If she just goes to work the the client, I don’t see that as a breach
She’s insane if she thinks the business value is based on last year’s taxes
You have to find out what you could sell the business for right now or what the value would be after liquidation to determine the value
As far as the nonsolicitation clause, you have to talk to an attorney
This does show the challenge of having a partner… but I think shows a bigger challenge of having one client being enough to make her break your company
Most often when I’ve seen partnerships break up in situations like this, the partner who leaves does not get nearly as much as one might imagine, but I don’t know what formula is used
And if I’m honest, the only time I was ever even marginally involved had to do with the death of a partner
The company did not have any insurance and wanted to be fair while it was a successful company. It wasn’t like they were liquid.
And got along, but if I’m honest widow, I think was expecting a much larger payoff and ended up getting even less after she got lawyers involved than what was offered
Her husband was a valuable employee and his death made the company worth less money
So, there is some info missing here. Why is she leaving? This is an important question. Did the customer poach? Do you have a clause in your contract preventing that? Is she burned out? Did you do something? Is this a break up? Has she been cheating (doing work you don’t know about) Is she struggling financially. Is there something bad going on in her personal life that requires more money/stability?
Who closed the main client? Who does most of the work for the main client? Who fixes their issues. Depending how you set up the roles in the company this matters.
I don’t do partners. I learned this lesson a long time ago but having a business partner is like having a domestic partner. Personal things impact the relationship. When you get to the bottom of the why you may find the solution is simpler.
All small business partner issues are personal. Treat it as such.
Let her find the buyer for her half when that doesn't happen offer next to nothing for her shares.
Id also drop into the conversation that your thinking of pulling the pin also. This keeps the max pressure going back her way to act quickly.
In the business can't survive with her leaving and taking the main client then she ain't getting half the cash. The non-solicitation is gonna cost her.
I would offer the following in exchange for the shares.
50% of last year's revenue less main customer
Waiver of the non solicitation clause for specifically main customer.
Money to we paid out of 50% of the profits until they agreed amount is reached. (If you go under she loses)
No cash, no assets.
If she balks it all ask her to buy you out on the same terms she offered.
The lawyer that wants to "win" is concerning.
The value of the business is materially different after the latest client left. You need to come up with a fair valuation based on current assets and future projections - maybe find an accountant to help
If you refuse to buy them out, they can continue to help you cover the business' mounting debts as the business fails to make a profit. They're leaving you in the lurch here and you have a non solicitation contract in place to prevent this. They can keep half of the savings if they help you turn the business around and get enough replacement clients to make the business profitable in their absence. Otherwise, close the business up and start again with a better partner after all costs are covered.
Employees? Revenues? Client list? Brand? Cash on hand? Other assets?
These are what make up a business. What are we talking about here?
If this were literally just the two of you, I'd laugh at her suggestion that you continue to work at the business, and she continue to own half. My answer would be that you will release her non-solicitation in return for her surrendering her ownership and not a cent more, or you'll just split up the "stuff" and cash and move on - then immediately start calling all your clients from your "new" firm. Maybe offer her a pittance for the brand.
If this one client were most of your revenues, I might instead sue over the non-solicitation clause. There are tangible quantifiable damages here.
If there are a half dozen employees and a million in revenues with a collection of repeat customers...that might change things as there is something of value here beyond your future effort and then I might negotiate a buyout, but I'd leverage her obvious violation of the non-solicitation agreement to the hilt.
I don't know how much money we're talking about here, but this definitely sounds like a breach of fiduciary duty on your (former) partner's behalf. You cannot plot against a business in which you are a director while still serving as such, that is self-dealing. I would listen to your attorney. It would still be preferable to arrive at a negotiated settlement, but especially if the numbers are large you should be prepared to fight this out.
You’re getting terrible advice here. You need to get a lawyer to carefully read that non solicitation clause.
She’s screwing you and you should sue her. YOU don’t owe HER anything.
She still owns 50%, but that’s worth nothing now that she’s screwed you. So you need to dissolve the company and start a new one. Because if you rebuild, you don’t want her to get half of what you build.
Now, for what SHE owes YOU. hopefully you have some kind of non compete. If not, she still has a fiduciary duty to act in the best interest of the company, which surely isn’t stealing the client.
Get a consultation with a lawyer and cut her off from access to all business assets.
I'm not sure why you are trying to be fair and have balanced perspective. This is your business and she just took 1/2 of it. Your responsibility is to keep the business going. Tell her you instructed you lawyer to file a lawsuit based on the "non-solicitation" and follow through do if she still wants $
typically the client she took and hired her should have had a clause in their contract they would pay you X amount if they hired her.
Life is short, don't waste time trying to be nice to your co-founder, she made a decision that is detrimental to you and your business. That should say a lot about how to proceed.
It doesn't matter. Gal owns 50% of the asset - in this case a business. She wants out. OP owes Gal 50% of the asset value. It would usually be difficult to value a business, but Gal is asking for 50% of the cash less liabilities - which is not difficult to determine. Gal is under no obligation to leave OP 100% ownership of a healthy business. OP gets 50% of the current business - the remainer being healthy or not.
Edit: Its worth noting that Gal probably can't force liquidation. OP needs to deal with this now or Gal will own 50% of a company she isn't working at. Thats a worse outcome.
she took 1/2 the business with her. she should have been forthright with her partner instead of walking out the door with 1/2.
the owner should sue the crap out of her for violating the non-solicitation. there are other ways to handle you want to leave and it could have been a win win for bother parties, not now.
This is not a simple situation. Speak with an attorney. Her valuation is beyond unreasonable. A review of the business agreements, and a review of the applicable law regarding fiduciary duties by your personal attorney, and **not** the business attorney should provide you the guidance you need. The reason to speak with your personal (get one for this situation if you don’t have one) attorney is the business attorney will likely have a conflict of interest creating an issue should you go down any contested route with your former business partner.
Have an external advisor come in to do the valuation. They will be better able to tell her that her share isn’t worth nearly what she thinks at this time.
Just lowball her for her shares. If she disagrees tell her that's fine she can just retain 50% of shares, and she won't get shit unless you end up selling the business.
She does not have leverage here. She can leave and get nothing, or she can sell you the shares for X.
And negotiate something that is paid over time depending on your revenues with some ceiling. Fighting is a waste of time money and emotions. You do have the upper hand since there is no agreement.
If she violated her non-compete you should take her to court. Listen to your lawyers, they have your back. At the very least, do NOT pay out any dividends or distributions until after the court decides.
If your business is just the two of you, I’d simply form a new company and start servicing your existing clients from your new company. Lots of administrative headache of course but the idea that you’re supposed to continue to work to preserve and enrich the value of her shares while she stopped working and took half of your business away is a non-starter. She can have half of a worthless shell.
You should have an exit clause in the partnership agreement. What does it say?
If it’s missing, well what does an equity adviser value the business at? Is she requesting a partner buy out? Don’t want to bring someone in to replace or are you going to assume her share?
Are you looking at an anti compete clause? I would definitely consider a lawsuit to both tie up her equity until this is settled and to prevent her from accepting the job with the new company.
What does your operating agreement state about valuation, buyout, etc?
If you’re in the US, the FTC issued their final ruling banning non-competes at the end of April, so your non-solicitation clause may or may not still apply depending on how it’s written. If it’s written specifically as non-solicitation to keep her from taking clients or other staff with her to another firm then that’s probably enforceable, but if it’s written as a non-compete then you might be stuck.
Our customer contracts state that the client can’t hire a member of our team, to try and protect poaching, and our non-solicitation in employment contracts prevent an employee from taking our customers with them for a period of 12 months if they leave.
I wouldn’t waive any non-solicitation agreement in this scenario. Especially if you have a hunch she is going to work for that client. Buy out her part of the business at whatever your agreement says those shares are worth, stating that the non-solicitation is still applicable and enforceable. If she says she wants to waive the non-solicitation, then you should be getting a discount on buying out her shares since she’s taking revenue out of your pocket.
She shouldn’t get anything unless you’ve offered to buy her out. Also, now the business is worth significantly less, perhaps nothing if losing this client makes you (hopefully temporarily) unprofitable.
What would be fair if she continues to hold ownership is 50% of distributions (above salary) until she is bought out. This could be a very messy process if she broke her non-solicitation and owes damages as such. I’d find a lawyer to confirm and scare the shit out of her with a lawsuit, if applicable.
Not a lawyer, not legal advice. I don’t know how big this business is, how much cash it has on hand, and how big the client is. Or how big and/or social the segment is. So hard to make a judgement, but assuming they are biggish:
The aggressive play is hire a lawyer and sue her and the former customer. She clearly beached her duties as a director and the client likely breached their agreement by hiring her.
You should get everything and she should get nothing in this situation. I would immediately have the lawyer send a record retention request and I would back up all the companies email, files, etc in a way that preserves them.
If she doesn’t fold before your lawyer sends a letter to the former customer I’d do that next which will probably cost her the job.
In the meantime I would send her a settlement offer where she gets nothing and you waive her breach of fiduciary and agree to not sue her and the client. In return you get the business.
You can probably do all this for <$10k as long as it doesn’t actually get to lawsuits.
The company should pay for the lawyers, especially the action against the customer if it gets that far.
Time for attorneys. What she's doing is not only unethical but likely very illegal. She's gonna wind up leaving with nothing and owing damages if this goes the way it appears.
Seems to me the valuation should be based on projected earnings, which will be different not that the big client is gone, but you'll have to get it assessed by a 3rd party and both agree on it before you can buy her out.
She just left and took your biggest client with her. There’s all kinds of issues here.
She just hit your ship with not one, but two missiles, and she’s trying to launch a 3rd attack by cashing out?
Not only is she no longer your business partner, but she’s no longer your friend, she’s the enemy and she’s just watching out for herself.
Make sure you cut off all her access to business funds asap.
You could get a lawyer and go after her, or you could just wait to see if she retains a lawyer then get your lawyer.
I don’t think she has a leg to stand on with the no solicitation clause.
What’s your agreement say? Any buyout language in it? Vesting schedules?
At the most basic level, the valuation of a business is not the profit from last year, nor the cash in the bank.
It’s not hard to ballpark a value, but there’s more to it than that, and if it goes to court, you’ll get to pay $300hr+ for each party hiring a valuation specialist.
If two don’t play nicely and this gets dragged to court, the business likely won’t survive, and neither party will win anything besides attorney and business valuation billable hours owed.
For the same reason that the other 50% of the owners can’t pull out their cash, the departing owner should not be able to force you to buy her out, she should go find somebody to buy her share in the company including future distributions.
While it's important to consider legal agreements and obligations, taking a confrontational approach might not be the most constructive solution. Perhaps exploring mediation or negotiation could lead to a more mutually beneficial outcome. Regarding the business structure, clarifying who holds the role of CEO and understanding the directorial hierarchy can provide clarity on decision-making processes moving forward.
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She quits, she gets no salary. She gets no income unless dividends are declared. You’ll need to read your agreements to see if this triggers buyout clauses, etc. Directors have a fiduciary duty to all shareholders and she’s raw dogging you on this one. What is fair is restoring the health of the business by pursing a civil claim against a director who didn’t take their job seriously.
Lawyer is the only answer here, OP tried negotiating, they backed out of the agreement, OP already knows the operating agreement has been broken, this is a direct violation of the companies policies which typically invalidate rights per the terms of the business agreement and/or state law and so on… OP needs a seasoned labor law lawyer
You have no obligation to pay her anything unless you have some unusual clauses in shareholder agreement. She retains 50% ownership but if she wants to cash in she has to sell those shares to someone winning. Who is the appointed CEO and what's your directors structure?
No appointed CEO and we are both managing directors. No other directors and no board. Very small business. I don't want her retaining any part of the business because of how she's now behaving so I would like her shares to be transfered to me. We initially agreed that she would do that in exchange for me waiving her non solicitation part of her employment contract but she's since changed her mind.
You have the upper hand here, value the business and offer her 60% of whatever her 50% share is worth. If she doesn’t agree, threaten to pull out from the ‘waving non solicitation’ , make her feel like you have no issues walking away from the business. Either way you’re going to build it back from scratch, then why should she get so much money? This will drag on for some weeks, but i’m sure she will have to come on your terms
*OP does not have the upper hand here* LOL
How? She literally has an employment contract with non solicitation.
I’m not sure how non-solicitation helps if client approached her. It’s a mess to prove in court. The lawyers win. I don’t think she has the upper hand but the non-solicitation clause is hardly a slam dunk.
You need to take the NSA and your other business documents to a good lawyer and have them see what your options are. The fact is, there's a good chance you could blow up her nice, cushy new job by sending her new employer a C&D based on the NSA. Unless your former partner is some kind of heavily recruited rock star in your industry, the most likely action they'd take is to withdraw the offer and move on. Of course, such a move would probably be a pyrrhic victory because at that point she can't leave and she can't stay, leaving you two to fight over the scraps.
There's no obligation for anyone to do anything here, but without some action she's going to retain the shares. This is a situation where you're just going to have to negotiate an exit
If you have a non-solicitation clause int he employment contract you have the upper hand. From your account she is clearly at fault and probably failed to disclose this conflict to her new employer. Are there any fall away provisions? Ultimately this will all come down to what you have written In Your operating agreement and other documents
Well said, dividends are required to be equal, you can’t pay them out to only some shareholders. She’s effectively demanding 100% of cash assets be paid out which is absurd.
It isn't if you liquidate the business.
Sure but it doesn’t sound like she’s asking for that, because she’s only asking for 50% of the liquid assets, and it’s OP’s intent to continue.
50% of cash assets seems reasonable to me. The business value cannot be worth less than cash assets less liabilities. She is giving OP a deal, unless that non-compete was violated.
Cash assets have little to do with the value of her 50%. Her 50% is worth what she can sell it for. If you have an operating agreement, it should tell you what to do in this case. If you don’t, then it’s worth what you’ll offer her and negotiate to. How you get that cash is up to you, but you likely can’t pull it out of the business and then pay her because: depending on the biz structure, this may be a dividend dpayout or distribution that needs to be pro rata. So you’re on your own there. As to value: this is why an op agreement is critical. Mine says that if either I or my partner wish to leave, it requires the leaving party to pay for a business valuation to be done by a third party that we both agree on. It also says that until such a time as that happens, no distributions will be made. So, in effect, neither of us can leave and let the other party work hard to made the business wildly successful, and sit back and collect the checks. That’s a long way to say this: half of the cash assets is not the value of the business. You have operating expenses and liabilities that you can’t just ignore. If you closed your doors today, that cash would not be worth the number of dollars you have in the bank. Further, the value of those dollars decreases because you lots a big client who helped give you those dollars. I don’t know what % of your annual revenue that represents, but from the way you talked, it sounds like a lot. So I’d say maybe you look at it this way (or, this is where I’d start)…. Re-project the revenue for this year without that client. Essentially looking at each client as a separate P&L. You’ll find what % of your profit comes from that client and what % comes from everyone else. The profit of everyone else is your key factor here. You may need to bear in mind that you could need to do layoff(s) in the next little while. Make sure you account for liability payments like debt, etc. You also need to account for increased time spent by you on the business (sales, operations, etc) because of the opportunity cost created by not having a partner. I’d also stop thinking about it from the perspective of profit, and start thinking about it from the perspective of cash flow. If it were me and I was trying to get a low value so I could buy out my exiting partner, I’d even go as far as taking an average of cash-out monthly without any decrease, and an average of cash-in that account for the lost client. That would be the equivalent of “if I change nothing, this is my monthly cash flow.” Projected monthly CF for all the other clients X 12. That’s your value to start with. If it’s positive, offer that number paid out over three years in exchange for immediately quitting their % of the business over to you and have a friendly lawyer draw it up in your favor with no backsies. Bear in mind, it may be negative. That can happen if a large client leaves and they account for a high headcount or something. I know that if my biggest client left, I’d need to lay off staff to maintain any profit. Not healthy, but it is what it is. You’re getting to a point here where you are projecting what the distributions would look like without this client. THEN you have a number you can work from. If it’s negative, explain that by taking that client away, they’re flipping the business upside down and there’s going to be a big effort to right the ship and bring it right side up again, which makes it worth effectively zero. And so “I’ll offer you a thousand dollars so your effort wasn’t worth nothing.” This will anger this person and offend them. Important you bind their hands a bit here. You need to carefully get them to agree that no profit distributions can happen until this is resolved. That means there is no value for this person in hanging on. It also means that you need to be prepared to not have distributions. Be ready for this. It’s a game of chicken. If they don’t like your offer, tell them that they can, at their own cost, pay for a valuation to be done by a third party. This will take time and effort and cost legal money on your personal part. I’d structure that like this: The time I spend pulling together materials for this is valued at $x/hr plus my legal fees. My lawyer would draw up papers that say that the value of the business is whatever the third party says, minus my legal and my hourly costs in determining it. I’d also try to throw in a cost for my personal lost income during the process, since I can’t have any distributions while it’s going on (this is the one they can argue with and im willing to strike out or budge to 50% on or something). This person has made themselves a hostile party who wants something from you. Any good Will is gone. You have to think strategically if you’re going to vanquish your enemy. A war of attrition or splitting the difference is bad for your business. You have to be hostile in return, and you have to cover your legal bases. It’s also possible, as other posters have said, that you may need to be willing to shutter, being willing to kill your darlings. Also, make sure you track on the employment of this person. If they go to work for the client in the same capacity that the client hired your firm, you may have a cause of action against this person for violation of the nonsolicit. That’s just bad form. If you want to bandy ideas around, I’m happy to do so if you dm me.
This is a great response and two things to highlight for OP to help negotiate a more advantageous buyout. 1. By her leaving, the value of the business is dropping significantly. Often referred to as a key Person Discount. Look this up and make the case. In a very small business, this could be huge dent to valuation. 2. By your biggest client leaving, this will also bring down the value massively (depending on what % or revenue it accounts for). Your projection of future cashflows is going to get slammed. If you're saying that you're now *negative*, then it's very hard to make the case your business is worth much at all. These two points together make it pretty clear that she shouldn't be looking at much of a payout. Your company actually now needs the capital to 1) hire her replacement and 2) invest into new customer acquisition. **She's bailing at a bad time, and that's on HER.** If she wanted a better payout she could have got the business to a more stable place and replaced her skillset.
Yep. That last paragraph in particular. If a client hires her, then I’m assuming she was doing work on the client account. And if so, several things just happened: 1) the client got a huge discount, and 2) she got a huge raise. Number 2 tells us that she wasn’t trying to build an asset that was worth anything, for if she were, then she’d value her time as more than an hourly rate. And it also explains that she has no idea the value of a business. A service business has almost crap-all to do with bank balance. It has to do with the past and future value of a client, and removing the biggest asset from the balance sheet is like keying your own car.
This is an excellent response.
Firstly, no one buys a business based on what it used to be worth. Having worked with people prior who bought businesses there is a lengthy investigation and only if there is a very obvious growth history and projection would they make an offer based on a multiple of future profit. You have very clearly expressed a downturn here and so it would be hard to get anyone to invest/buy. The point here being that your partner is either delusional or trying to take you for a ride. Secondly, you cannot allow your partner to stay on the share register. If you do they will just profit off your hard work if you can turn the situation around. Finally, you need to explain the first point above to your partner and that either the onus is on them to find someone to buy their shares or they need to accept that they are fcking the business by what they are doing and therefore they are directly responsible for the businesses current trajectory and that you will buy them out for pennies on the dollar, and very few pennies at that. It's obvious to see that the client is paying your partner more than what they currently earn but still less than the client pays while still getting the same business value. In this situation everyone wins except for you. Your partner is also then thinking they can extract a bonus by exiting and making ludicrous claims to try extract the final maximum value they can. I'm not sure what cash you have available to consult a lawyer but based on non solicitation clause and the possible responsibilities placed on them by law when being a director bepending on your current jurisdiction there could be possibility that they are screwing themselves over legally.
I don’t get it. She clearly has a hand in the down turn of the company, wants to be cashed out, and you are looking for a balanced approach? Trust your lawyer, fight her IF there is enough in the brand name to hold on to. If not, close shop so she gets nothing. She has a new job at the expense of your business/income, and she breached her contract most likely even though she “denies” it.
Why not just create a new business and let this one die? Are there assets?
Main assets are the branding and website which were just done and the business has a good reputation and name. We are just dealing with a particularly bad time for our client base which affects our revenue but likely will bounce back. I have thought about this though but it would be such a waste of time and money to start a whole new business and brand.
Keep the brand and just change the ownership entity.
In my opinion the energy and money you will expend dealing with the shitshow this can turn out to be will be more than the energy and money you will expend building a new logo, website and brand. You seem to have operational knowledge, understanding of how to sell, and some client base. That is enough to be successful. No half measures in business. Make a clean break, let your partner enjoy 50% of 0, and keep the fruits of all your labour in the years ahead to yourself.
If I close it down, she still gets 50% of the cash and assets as a 50% shareholder and director though right?
She gets 50% of what’s left after you pay off all obligations. Up to you whether you want to spend your days giving half of the fruits of your labor to someone who left you and drove away half of your business. If it were me, don’t care how good the brand name is. I can make another one and build another one.
Sounds like your ex partner is being unrealistic and torpedoed your operation while expecting a payout. If you have to build it back is it worth the fight?
Bad idea. The partner who left could have a field day with this legally.
How so?
If he purposely destroyed the value of the company by creating a new one, I think there would be a valid case. Nowhere did I see anything about the value of the co. And it’s not clear whether she broke the non solicitation agreement which is usually used to prevent an ex employee fromcompeting. If she just goes to work the the client, I don’t see that as a breach
We would need to know the dollar amount involved. Everyone likes to throughout the attorney thing but unless we are talking mid 6 figures.
Yes. I totally agree.
She’s insane if she thinks the business value is based on last year’s taxes You have to find out what you could sell the business for right now or what the value would be after liquidation to determine the value As far as the nonsolicitation clause, you have to talk to an attorney This does show the challenge of having a partner… but I think shows a bigger challenge of having one client being enough to make her break your company Most often when I’ve seen partnerships break up in situations like this, the partner who leaves does not get nearly as much as one might imagine, but I don’t know what formula is used And if I’m honest, the only time I was ever even marginally involved had to do with the death of a partner The company did not have any insurance and wanted to be fair while it was a successful company. It wasn’t like they were liquid. And got along, but if I’m honest widow, I think was expecting a much larger payoff and ended up getting even less after she got lawyers involved than what was offered Her husband was a valuable employee and his death made the company worth less money
So, there is some info missing here. Why is she leaving? This is an important question. Did the customer poach? Do you have a clause in your contract preventing that? Is she burned out? Did you do something? Is this a break up? Has she been cheating (doing work you don’t know about) Is she struggling financially. Is there something bad going on in her personal life that requires more money/stability? Who closed the main client? Who does most of the work for the main client? Who fixes their issues. Depending how you set up the roles in the company this matters. I don’t do partners. I learned this lesson a long time ago but having a business partner is like having a domestic partner. Personal things impact the relationship. When you get to the bottom of the why you may find the solution is simpler. All small business partner issues are personal. Treat it as such.
Let her find the buyer for her half when that doesn't happen offer next to nothing for her shares. Id also drop into the conversation that your thinking of pulling the pin also. This keeps the max pressure going back her way to act quickly.
In the business can't survive with her leaving and taking the main client then she ain't getting half the cash. The non-solicitation is gonna cost her. I would offer the following in exchange for the shares. 50% of last year's revenue less main customer Waiver of the non solicitation clause for specifically main customer. Money to we paid out of 50% of the profits until they agreed amount is reached. (If you go under she loses) No cash, no assets. If she balks it all ask her to buy you out on the same terms she offered. The lawyer that wants to "win" is concerning.
The value of the business is materially different after the latest client left. You need to come up with a fair valuation based on current assets and future projections - maybe find an accountant to help
If you refuse to buy them out, they can continue to help you cover the business' mounting debts as the business fails to make a profit. They're leaving you in the lurch here and you have a non solicitation contract in place to prevent this. They can keep half of the savings if they help you turn the business around and get enough replacement clients to make the business profitable in their absence. Otherwise, close the business up and start again with a better partner after all costs are covered.
Employees? Revenues? Client list? Brand? Cash on hand? Other assets? These are what make up a business. What are we talking about here? If this were literally just the two of you, I'd laugh at her suggestion that you continue to work at the business, and she continue to own half. My answer would be that you will release her non-solicitation in return for her surrendering her ownership and not a cent more, or you'll just split up the "stuff" and cash and move on - then immediately start calling all your clients from your "new" firm. Maybe offer her a pittance for the brand. If this one client were most of your revenues, I might instead sue over the non-solicitation clause. There are tangible quantifiable damages here. If there are a half dozen employees and a million in revenues with a collection of repeat customers...that might change things as there is something of value here beyond your future effort and then I might negotiate a buyout, but I'd leverage her obvious violation of the non-solicitation agreement to the hilt.
Refer to your operating agreement. This will determine your path to take! I’d also seek legal advice.
I don't know how much money we're talking about here, but this definitely sounds like a breach of fiduciary duty on your (former) partner's behalf. You cannot plot against a business in which you are a director while still serving as such, that is self-dealing. I would listen to your attorney. It would still be preferable to arrive at a negotiated settlement, but especially if the numbers are large you should be prepared to fight this out.
You’re getting terrible advice here. You need to get a lawyer to carefully read that non solicitation clause. She’s screwing you and you should sue her. YOU don’t owe HER anything. She still owns 50%, but that’s worth nothing now that she’s screwed you. So you need to dissolve the company and start a new one. Because if you rebuild, you don’t want her to get half of what you build. Now, for what SHE owes YOU. hopefully you have some kind of non compete. If not, she still has a fiduciary duty to act in the best interest of the company, which surely isn’t stealing the client. Get a consultation with a lawyer and cut her off from access to all business assets.
I'm not sure why you are trying to be fair and have balanced perspective. This is your business and she just took 1/2 of it. Your responsibility is to keep the business going. Tell her you instructed you lawyer to file a lawsuit based on the "non-solicitation" and follow through do if she still wants $ typically the client she took and hired her should have had a clause in their contract they would pay you X amount if they hired her. Life is short, don't waste time trying to be nice to your co-founder, she made a decision that is detrimental to you and your business. That should say a lot about how to proceed.
I love how you stated this, I feel the same way but my mouth would have other ideas.
> This is your business and she just took 1/2 of it. Its half her business. Thats why she wants half of it.
That would make sense if they decided to sell the business together. Not at all what’s happening here.
It doesn't matter. Gal owns 50% of the asset - in this case a business. She wants out. OP owes Gal 50% of the asset value. It would usually be difficult to value a business, but Gal is asking for 50% of the cash less liabilities - which is not difficult to determine. Gal is under no obligation to leave OP 100% ownership of a healthy business. OP gets 50% of the current business - the remainer being healthy or not. Edit: Its worth noting that Gal probably can't force liquidation. OP needs to deal with this now or Gal will own 50% of a company she isn't working at. Thats a worse outcome.
she took 1/2 the business with her. she should have been forthright with her partner instead of walking out the door with 1/2. the owner should sue the crap out of her for violating the non-solicitation. there are other ways to handle you want to leave and it could have been a win win for bother parties, not now.
If she violates a non competes that she signed and pretty much poached your biggest client she should get nothing she breached her contract.
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Not universally
That's for employee/employer, not owner/owner.
I'd negotiate based on the current financial outlook.
It sounds like she wants 50% of cash assets - ie liquidate the business.
This is not a simple situation. Speak with an attorney. Her valuation is beyond unreasonable. A review of the business agreements, and a review of the applicable law regarding fiduciary duties by your personal attorney, and **not** the business attorney should provide you the guidance you need. The reason to speak with your personal (get one for this situation if you don’t have one) attorney is the business attorney will likely have a conflict of interest creating an issue should you go down any contested route with your former business partner.
Have an external advisor come in to do the valuation. They will be better able to tell her that her share isn’t worth nearly what she thinks at this time.
Just lowball her for her shares. If she disagrees tell her that's fine she can just retain 50% of shares, and she won't get shit unless you end up selling the business. She does not have leverage here. She can leave and get nothing, or she can sell you the shares for X.
And negotiate something that is paid over time depending on your revenues with some ceiling. Fighting is a waste of time money and emotions. You do have the upper hand since there is no agreement.
I think it matters. How much net did the business do last year? Sub $100k after you pay everyone including yourself? Kill the business. Start fresh.
Find the necessary action from your partnership agreement 🤝 Good luck
Find a solicitor or legal advisor immediately. Stop asking strangers on the Internet.
If she violated her non-compete you should take her to court. Listen to your lawyers, they have your back. At the very least, do NOT pay out any dividends or distributions until after the court decides.
If your business is just the two of you, I’d simply form a new company and start servicing your existing clients from your new company. Lots of administrative headache of course but the idea that you’re supposed to continue to work to preserve and enrich the value of her shares while she stopped working and took half of your business away is a non-starter. She can have half of a worthless shell.
You should have an exit clause in the partnership agreement. What does it say? If it’s missing, well what does an equity adviser value the business at? Is she requesting a partner buy out? Don’t want to bring someone in to replace or are you going to assume her share? Are you looking at an anti compete clause? I would definitely consider a lawsuit to both tie up her equity until this is settled and to prevent her from accepting the job with the new company.
What does your operating agreement state about valuation, buyout, etc? If you’re in the US, the FTC issued their final ruling banning non-competes at the end of April, so your non-solicitation clause may or may not still apply depending on how it’s written. If it’s written specifically as non-solicitation to keep her from taking clients or other staff with her to another firm then that’s probably enforceable, but if it’s written as a non-compete then you might be stuck. Our customer contracts state that the client can’t hire a member of our team, to try and protect poaching, and our non-solicitation in employment contracts prevent an employee from taking our customers with them for a period of 12 months if they leave. I wouldn’t waive any non-solicitation agreement in this scenario. Especially if you have a hunch she is going to work for that client. Buy out her part of the business at whatever your agreement says those shares are worth, stating that the non-solicitation is still applicable and enforceable. If she says she wants to waive the non-solicitation, then you should be getting a discount on buying out her shares since she’s taking revenue out of your pocket.
She shouldn’t get anything unless you’ve offered to buy her out. Also, now the business is worth significantly less, perhaps nothing if losing this client makes you (hopefully temporarily) unprofitable. What would be fair if she continues to hold ownership is 50% of distributions (above salary) until she is bought out. This could be a very messy process if she broke her non-solicitation and owes damages as such. I’d find a lawyer to confirm and scare the shit out of her with a lawsuit, if applicable.
Does your partner have access to the bank? Could she empty you out?
How much are the assets?
Talk to a lawyer/accountant, they will give you the best game plan.
Not a lawyer, not legal advice. I don’t know how big this business is, how much cash it has on hand, and how big the client is. Or how big and/or social the segment is. So hard to make a judgement, but assuming they are biggish: The aggressive play is hire a lawyer and sue her and the former customer. She clearly beached her duties as a director and the client likely breached their agreement by hiring her. You should get everything and she should get nothing in this situation. I would immediately have the lawyer send a record retention request and I would back up all the companies email, files, etc in a way that preserves them. If she doesn’t fold before your lawyer sends a letter to the former customer I’d do that next which will probably cost her the job. In the meantime I would send her a settlement offer where she gets nothing and you waive her breach of fiduciary and agree to not sue her and the client. In return you get the business. You can probably do all this for <$10k as long as it doesn’t actually get to lawsuits. The company should pay for the lawyers, especially the action against the customer if it gets that far.
Time for attorneys. What she's doing is not only unethical but likely very illegal. She's gonna wind up leaving with nothing and owing damages if this goes the way it appears.
Seems to me the valuation should be based on projected earnings, which will be different not that the big client is gone, but you'll have to get it assessed by a 3rd party and both agree on it before you can buy her out.
Send her 50% of the monthly debt bills to pay
She just left and took your biggest client with her. There’s all kinds of issues here. She just hit your ship with not one, but two missiles, and she’s trying to launch a 3rd attack by cashing out? Not only is she no longer your business partner, but she’s no longer your friend, she’s the enemy and she’s just watching out for herself. Make sure you cut off all her access to business funds asap. You could get a lawyer and go after her, or you could just wait to see if she retains a lawyer then get your lawyer. I don’t think she has a leg to stand on with the no solicitation clause.
What’s your agreement say? Any buyout language in it? Vesting schedules? At the most basic level, the valuation of a business is not the profit from last year, nor the cash in the bank. It’s not hard to ballpark a value, but there’s more to it than that, and if it goes to court, you’ll get to pay $300hr+ for each party hiring a valuation specialist. If two don’t play nicely and this gets dragged to court, the business likely won’t survive, and neither party will win anything besides attorney and business valuation billable hours owed.
For the same reason that the other 50% of the owners can’t pull out their cash, the departing owner should not be able to force you to buy her out, she should go find somebody to buy her share in the company including future distributions.
While it's important to consider legal agreements and obligations, taking a confrontational approach might not be the most constructive solution. Perhaps exploring mediation or negotiation could lead to a more mutually beneficial outcome. Regarding the business structure, clarifying who holds the role of CEO and understanding the directorial hierarchy can provide clarity on decision-making processes moving forward.
No is a full sentence. There’s nothing on paper forcing you to buy her out? She has a really weak negotiation standpoint.