Forums: Discussions for entrepreneurs and small business.

I`m having a very serious problem with my business partner and it could kill our company.  I don`t know how to handle this for the best of the company.

First, a little background:

I came up with an idea for a business in 2005, and worked for about a year developing the idea on paper.  In early 2006 I first met and approached my current business partner about helping me make the business real, and formed an LLC with him.  We each have 50% of the membership units and 50% control of the company.  I needed a warm body to help me get the business started.  Yes, I realize that was a mistake.  We have not contributed any significant money to the business, only lots of time.

The company is a HUGE success.  We are fully funded through non-equity, non-family loans, and we have reached 20% of our sales goal, even though our product and services line is only about 50% complete and most customers are waiting for closer to 100% completion.  Our net revenue is projected to be around $3 million by the end of 2007, and franchising our business model or opening additional locations is a very real possibility.

As 50/50 partners, we are supposed to vote and agree on all policy issues, and work towards our goal in our business plan.

Anyway, here`s the problem:  I am doing my best to keep my strategic eye on the big prize as we have outlined in our business plan, and we have developed detailed documentation on what we need to do to reach our goal so everyone is on the same page, but my partner gets distracted at the slightest issue.  While I`m focused on completing a major product line to sell to identified customers to realize hundreds of thousands of dollars, he ignores agreed-upon tasks to developing a little trinket, completely unrelated to our business model and not on our task list, to be sold to walk-in customers in our lobby for a dollar each (if every single walk in customer bought one, it would be maybe $30 a day!).  While I am working on developing strategic relationships with vendors and partnering companies, he goes behind my back and talks to the vendors and partnering companies to try to charge them money to work with us (counter to our business plan and not discussed between us), which destroys the relationship (this has happened 6 times that I know of).  After I get the CEO and executive people of each company totally jazzed about working with us, my partner comes into my office and casually says, "Oh, I just talked to Company X, and they have decided not to work with us."  God only knows exactly what else he said to them...he claims he said nothing that would change their point of view.

Lately, he keeps coming up with arbitrary policy changes without discussing them with me first, and these policies directly affect our customers, such as suddenly charging 3 times more for a service, charging an admission fee to our walk-in customers, and asking people to make their children wait outside (we are a family-friendly business with no policy or insurance restriction on kids).  None of these policies were things that we talked about...he simply announces them as policy.  We have lost customers directly from these policies.  When I confront him on these policy changes, he says "I thought that would be best."  Then I have to spend time undoing the damage.

For these reasons, I feel that our company will crash hard if he continues to sway our company in his own rogue and random direction instead of along the agreed path that follows our business plan and company mission.

So obviously I`d like to get him out of the company for the benefit of the business.

But here`s the kicker:  One of our part-time employees arranged some side work through two company customer contacts...which is fine.  The side work is unrelated to our company`s direct product offering but he will use idle company equipment to produce the work, and he will perform the work on his own time.   No problem...this is completely allowed.

I have just learned that my business partner told the employee that the employee will have to pay half of the gross side job money to him (my partner) personally as a "consulting fee".  He specifically stated to the employee that they will need to keep the side work payment a secret from me.  Luckily, the employee is very honest and loyal to the company and came to me about it confidentially.

If my partner told the employee that half of the job would need to be paid to the company in trade for using the company equipment, that would be one thing (even though our policy is to let employees use idle company equipment during their off time as they see fit)...but to pressure the employee for a secret personal payoff gain seems very dishonest to me.  The numbers we are talking about are into the thousands of dollars.

The combination of his rogue actions and distracted focus on the business, combined with his dishonesty in using the business for his own personal gain are not characteristics that I want in a partner.  But I`m stuck and I don`t know how to get him out.

So, how should I handle this?

  o  Should I try to buy him out and move on with the business?

  o  Should I have the employee go forward with the secret deals and document the transactions and then confront and force my partner out on the grounds of impropriety or embezzlement?

  o  Should I take a chill pill and work out our differences and move forward, and hope the company doesn`t crash and burn?

  o  Should I resign from the company and restart it on my own?

  o  Is there some other way to force a 50/50 partner out of an LLC?

Thank you!!!

As part of my small business consulting, I run into different situations like this.  For something this serious you are going to need (shudder) a lawyer.  A buyout will probably be a farce based on your partner`s current behavior.  Is your company process, ideas etc. protected by copyright/patent/trademark laws?  That will prevent him from opening up across the street with the same business.   You say you both put in time, but no money, who does the equipment belong to?  Who do the clients belong to?  I would recommend having a qualified contract attorney in your state review your LLC and show you the outs.  Also, did the partner always have this behavior and you never noticed or is it something new?  Could be a drug/alcohol problem?  Good luck.

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Dale
www.ourbestidea.com
www.maskerinsurance.com
www.maskercreations.net

Hi Dale...

Thank you SO much for your reply.  Yes, I`m afraid I will need to talk to a lawyer about this.

He mentioned one time in an argument that his buyout price was $500k, but when I asked him if that deal applied to me too if I walked, he said that I would have to pay HIM $150k for me to leave.  He thinks in a different way.

We can`t really protect this business model with any IP protection method, but fortunately this idea was not his at all, and I am 100% positive that he could not start his own version of the company or even run this one if I left.

The equipment belongs to the company (LLC, so each of us 50/50) but were purchased with the money we raised from loans.  The customers were developed entirely by the company and neither of us knew any of the clients before we started the company.

His behavior is not new, and we have always had disagreements about my core concept of the company.  But it was always manifested in minor squabbles.  Now he is getting more blatant in his rogue actions and seems to rebel against me trying to steer the company to keep it on track.  He seems to resent me giving any direction to him, despite the fact that this was 100% my concept before we even met.  He wants the company to have two equal bosses...and I don`t know of a SINGLE company that uses that management style.

I am certain he is not using drugs or alcohol...he is just sort of a socially stunted person who looks at the world in a much different way than other people.  He is also very insecure in a lot of areas...when we have staff meetings, it has to be in a "neutral room" and not in his or my office.  I, on the other hand, don`t care in the slightest where we meet, but he insists on making the meeting place non-territorial as if we are competing against each other instead of working as a team.

I will seek a lawyer.  I would still like to hear advise from the other great minds on this forum.

Thank you!

The lawyer will be able to advise you correctly.  A buyout of his interest is going to be costly at best and like I said, probably not feasable.  Would you let him buy you out?  And if so, what is your investment of time worth at this point?  You might consider that and letting him choke on it....

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Dale
www.ourbestidea.com
www.maskerinsurance.com
www.maskercreations.net

I am considering the option of stepping down and letting him crash the company.  He really doesn`t know how this company should be completed or run in terms of what our customers need.

A few minutes ago as I was typing this reply, my employee came into my office and told me he is about to sign the NDA with one of the side job clients, and he is also going to get a signed agreement with my business partner for the secret deal of my partner pressuring him for the 50% "consulting fee" without me knowing about it.  If I do need to force him out, I could approach him and explain calmly that I know about the deal and have documentation and witnesses, and if he doesn`t resign and relinquish his interest in the company immediately, then I will file charges with the district attorney and make an announcement to our customers and private lenders describing his actions.  I guess that document will be an important key if he forces me to go that route.

I feel sick to my stomach right now.  This is no way to enjoy an exciting and thriving new business, is it?

Thank you for your help!  It is nice to hear from neutral parties to make sure I am acting in a non-emotional manner that is in the best interest of this company.

Wow,
It seems like you have lots in your hands and there is alot at stake. I am not a lawyer, nor am I an advisor, but you are in a tough situation, see here is where buying your partner out would hinder your operation.
You stated above that the projected net revenue for the year 2007 is around 3 Million Dollars! Now how did you come up with such number? Is this one of those fancy fluffed up numbers that you computed while writing your business plan or do you have proof to show for it?
See the reason why I am asking is, it`s going to be difficult buying someone out if the projected net revenue is $3 Million!
How much are you willing to pay to buy him out? The dude is going to want his fair share (his cut) at about 1.5 Million? correct?
Your best bet is to dissolve your LLC and start a new one, only this time be wise and form it on your own... Did you name your business something like My Company. LLC or do you have a DBA under your LLC ( I don`t know if this can be done with an LLC).
Secondly, if the numbers on your business plan are just projected numbers you may have an argument if this goes to court. All you have to tell the judge is, "Your honor this is a business plan, it does not state any sense of security"
Which basically that`s what a business plan is, it`s just a plan! and it does not guarantee you that everything you`ve written in it will come true.. We always like to think as if everything we wrote in "The Plan" is going to be feasible.
But, leave room for growth and disappointments.

As for your partner? It`s a tough call, I`m in a same situation as you, the only difference is, I own a Corporation, I own 80% of the company, he owns 20% so in a corporation Majority of votes rule.
Also, before you decide to go further? I don`t know if you had to create Bylaws, and Minutes... If you did, you can call a meeting; and address that issue. I believe its called conflict of interest between board of directors.
Then, come up with a resolution a three strike rule, that if he keeps it up you will have to vote him out. make him sign, and if he keeps it up, then vote him out. Make sure that is stated in your Company Bylaws to- I don`t know if you had to form Bylaws, but the bylaws addresses this issue.
Next time go with a full C corp and sub-chapter S...

Have a good one

-------------------------

Edgar Monroy
Web Developer / Owner / Consultant
When starting your own business the need to "know-how" is greater than money!
http://www.nuevolution.net

50% pPartnership with just another is hard when it goes sour. It`s time to get out of such situation.  How? Maybe use a "Chinese buyout", meaning both partners bid for the company, however, if A bid $1M then B has the right to buy it at that amount and vice versa.  Thus each may want to bid as high as the real value of the company as he sees it.  Of course bluffingis possible, but even then there will be a clear final transaction, where one gets the company and the other the money.

Then you can restart a similar business.  I did have my restart too.  And I heard the staying buys are folding the company I founded.  It was a hard lesson for me too, to partner with wrong people.




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One more thing I can say is my previous company is a corporation that I still own a major share, but that`s worthless with it going down.  I was the founder and majority shareholder until we got more invesment from a person that belongs to the same ethnic group as the CEO that I hired.  Then I lost my majority and control of BOD.  The CEO is an imbecilic power grabber so I resigned to work on a lucrative contract and to restart my company.  Well they`re going down and I`m going up so it`s a consolation.  But still, I wasted 2 years building a company that`s gonna flop because of disagreements and some "hidden agenda" and collusion amongst directors of same ethnic group.  My example shows a C corp is not necessarily a solution.

Live and learn I guess.

"When the going gets tough the tough keeps going"



-------------------------

Go Green and put more money onto your bottom line with award-winning LED-based light bulbs PearlLED. If you manage a good sized store/business and want to boost the bottom line, call us!

I think your best bet is not to let him, crash the company....
I think what you should do  is, try to resolve the problem. It seems like he doesn`t respect you or your decisions. See here is the thing, if you let him crash the company, then you would loose all your customers. and there goes your Forecasted 3 Million down the drains...

Also, what you can do is, Start another company on the side, a new business venture, on your own.
And slowly start advertising to your customer`s that you are open for business.
If you are providing your customers with great customer service, they will follow you. Once the LLC is not making enough to survive, Then you can close the company. In the mean time you`ve already built up your own company different name.
THIS TIME BE CAREFUL WITH PARTNERSHIPS

-------------------------

Edgar Monroy
Web Developer / Owner / Consultant
When starting your own business the need to "know-how" is greater than money!
http://www.nuevolution.net

yes, I remember that sick to the stomach feeling .. It lasted months.

From the sidelines here I think your partner feels overwhelmed  by your dominance of the company, and is seeking to even the score and try to make some part of this company his own.  The purpose of the little 1$ trinket is that it is HIS idea, not yours. From his point of view the consulting fee is justified to adjust the balance of power.

Many people here (including yourself) have talked about starting over. I think that might be the way to go. Remember we don`t know a great deal about your details, but these are the steps I would take.

See a lawyer unknown to your partner and look at all the options. I would still be very wary of forcing your partner out. Hiring a lawyer to fight you would put him right into his comfort zone. This could tie you up for months/ years.

Take a chill pill, Let him to that trinket thing, Keep him busy and out of your hair. Make some sort of Peace with him.

Lower the debt, get projects completed. I would try to get as much money out of the company as i could with out incurring any more debt.

Start a new company on paper. Bank accounts, Business plan etc.... But keep it to yourself

Say "I quit"

Be ready to buy him out or be ready to walk. You will be prepared because you talked to your lawyer in step 1 and you are doing it at the time most convenient for you. Faced with running the show by himself, he will be out of his comfort zone, and might go for the buy out. You just can`t bluff this one.