Negotiating Business Deals/Buyout Agreement

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Question
Hello,
I am in need of advice concerning a buyout agreement with my business partner.  After 1 1/2 years developing a product and 6 months with product in hand my business partner has decided he no longer has the time or desire to work and thus has asked to be bought out.  Our company currently has 45,000 of gross sales from online, one trade show and a kiosk along with 75,000 of expenses (no major assets.)  So with no cash flow, no patent yet and $34,000 invested between the 2 of us, he is asking for $50,000 and will not negotiate any lower.  Do you believe this is a fair number for him to be asking?  If not, what are my alternatives?  He is stuck on that number and wont settle on anything less.  He doesn't need it all right now but needs a guarantee that he will eventually get that amount over time.  He also informed me that if the buyout does not happen now he will work for 3 months and ask for a higher buyout number based of increased sales.  I am feeling trapped here and my operating agreement does not specify anything that would help me in this situation.   Your insight and suggestions are greatly appreciated.

Answer
Dear Kevin,

You're in a tough spot. You had to have Buy-Sell Agreement from the very beginning of your partnership. The agreement should've specify how every possible situation will be handled. From your inquiry I presume that you don't have such agreement in place.

Regarding suggested solution to your specific situation, I would suggest to go with some kind of earnout arrangement where the amount you're paying depends on the profit generated by the business. If you don't have any intellectual property, like patents, attached to your product, the business currently isn't worth anything. You wouldn't be able to sell it on the market. If you do have a patent, than the situation may be different - it's subject to a separate conversation.
Bottom line, both partners should be carrying risk associated with the business. The other partner shouldn't get anything if the business won't succeed. However, if you started making some money, you can allocate something like 10% of net profit towards buying back the other parner's shares. For example. First year you are in red - paying nothing; second year your net profit is $100,000 - you're paying $10K to the former partner; third year you made $200K - paying $20K to the partner, and so on, until the entire $50K is paid off. If you won't be able to make any money, you won't pay anything.

I think that such arrangement is more than reasonable. Regardless how you've decided to go, use a lawyer to represent your interests; these are money well spent, so you won't be screwed.

Good luck,
Jacob Berenfeld
Global Business Group - Business Brokers

Negotiating Business Deals

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Jacob Berenfeld

Expertise

Selling a small business, buying a small business, preparing business for sale, small business appraisal (valuation), exit strategy planning, business coaching.

Experience

I am a business broker with over ten years of experience helping small business owners to sell their businesses. I am a small business owner myself, managing partner with Global Business Group - California business brokerage firm.

Organizations
BIR Business Brokers Network

Publications
You can see my articles at Small Business Blog, http://www.gbgusa.com/small-business-blog.html. You can also read my discussions and answers on www.linkedin.com.

Education/Credentials
MS in Electronics, licensed California business broker.

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