Need some unbiased opinions

Here is the scenario. I am a close relative of one of the partners in this scenario and just need an unbiased opinion on what direction to go with it.

Two partners go into business together. Each brings an equal share of capital to the table to buy inventory. One partner works at the business full time selling the product and fixing the product. He is paid a monthly salary of 2,500. The other partner has a full time day job and takes phone calls to sell product, shows product when he can and helps fix product two to three days a month. The first partner has the skills to fix the more in depth problems with the product and the second partner just reconditions the product and makes it cosmetically ready to sell. The second partner recieves 800 a month for his contribution. In addition to the 2,500, the first partner, after fixing in depth problems with product belonging to company, posts ads for fixing product similiar to the product being sold by the company. He initially agreed to put $ from service on "extracuricular" product into the company. After a couple of months, he sees that partner two is contributing nothing to fix extracuricular product but still getting half the proceeds. After discussion, partner one refuses to place any more money from service into business. Partner two is adamant that since partner one is taking a 2,500 salary, anything extracuricular is business money too.

Any thoughts??

unbiased? at bogley? good luck with that.

are both partners family members?

not sure how partner 2 is getting half of the proceeds. looks like he is on a salary of 800/mth. only way for him to get 1/2 is if the partnership is dissolved.

was there a contract between the two partners spelling out what to do in this type of scenario? they both brought equal amounts to the table on startup. so is there profit sharing?

so, what direction would i go? probably the other way. fast. how close are you related? like are you married to one of the partners? :roflol: if not, i'm not sure if it's any of your concern. unless it part of your potential inheritance.

can partner 1 buy out partner 2? then partner 2 can stay on a straight salary, or get the axe.

Hey it is unbiased if nobody know the parties involved. :wink: One of the partners is a cousin. As far as profit sharing, any of the $ made after partner one recieves his 2,500 and partner 2 recieves his 800 is back into the business as capital to be split 50/50 if and when company is dissovled. The big hang up with partner two is that partner one is using the company building to make money doing service work that partner 2 is unable/lacks the skills to do as well as time since he holds a full time day job. In addition, partner 1 has the capital to part ways and start own company whereas partner 2 doesn't. Partner 1 is willing to forego dissolving the partnership and starting his own company as long as he maintains his 2,500 salary per month and he is allowed to keep all revenue from service that he performs. Partner two acknowledges that partner 1 has motivation and capitlal to start own company, but still insists that service done in company building goes to company, not to partner 1. I know the obvious seems to tell them to dissolve it and go separate ways, but still wanna hear what team bogley has to say about partners one and two. Again, one is a cousin and the other is merely an aquaintance. One of them came to me asking for an unbiased opinion and i didn't want to get drug into it.

Oh ya, as for the contract... everything was done verbally before the start up. :nono:

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Originally Posted by Reedus

Oh ya, as for the contract... everything was done verbally before the start up. :nono:

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ohhh........ bad idea. i'd be getting something on paper. if it ever goes to court it'll be a he said, he said. not good. and somebody will be :cry1:.

if p1 is putting more of a contribution back into the business i would think that it should increase his share of the stock (so to speak) since he now has a greater financial contribution.

i would also think that if p1 starts his own company and no longer has anything to do with the company other than as an investor, i'm not sure he would be entitled to the salary.

however if he still is preforming duties associated with what he is doing now he would be entitled to the salary as an employee, but not necessarily the revenue from service.

i don't think you can have it both ways.

maybe the thing to do would be to have the service as a separate division of the company, since p2 doesn't seem to be interested in it, and p1 would receive all revenue from it, after expenses. ie maybe some rent for the building and utilities etc..? or p1 could relocate the service division and preform it in another building altogether.

If P1 starts his own business separately, his name will be removed from the current LLC and he would have nothing to do with period. So as it sits, the big quandry is that P1 is willing to continue doing business with P2 on the condition that P2 quits his day job and contributes to the business as an equal partner time wise. P1 takes a paycut to 1,700 a month and P2 gets a raise to 1,700 a month. The big problem with that is P2 is unable financially to quit his day job. The other option is for business to continue as usual where P1 maintains his salary of 2,500, P2 maintains day job and recieves 800 for odds and end work where he can, and P1 gets all the revenue from service on outside work. P2 won't agree to that and thinks P1 should put all service money into the business and then take a commission percent off the service he performed. P1 says no dice, if he does all the work service wise, he is entitled to all the money service wise.

I realize that you are trying to be very general to help keep everyone unbiased, but without more details it is difficult to give good advice. Can you give us any idea of what industry this is? Are they currently in the black or the red? Is the success of the business slated to grow or are stay its current course?

Without knowing more I am mostly just guessing but here are my thoughts:

P1 sounds like he is doing a lot more and thus deserves more. If P2 can't afford to leave his current job to go full time, than my recommendation would be to have P2 set a date that he can go full time and let him plan and save accordingly if he (and they) really want to pursue this endeavor. Also create a contract for how things should go once both are working full time.

My wife's uncle is a wealthy man. He started company with a friend of his and it got to the point where he was doing all the work and his partner was still taking half the money. They had an agreement in their contract that whatever the one partner offered the other for buying him out then receiver of that offer could buy out the extender of the offer for that same price (making it so you don't want to over offer, or low ball the other partner). It helped their partnership end well, and it sounds like these two would benefit from a similar agreement.

It is a used powersports shop. Both p1 and p2 put up 22,500 for capital to buy inventory. The business is up and down some months you clear 5 to 6k after both salaries are paid, and some months you barley break even. They even had one month in April wjhere they lost about a grand. From 45k in February, it has turned into 57k in June after salaries and rent is paid. So as it stands, p1 has made 12,500 salary and has profit sharing of the 12 grand that the company has made. So he has made 18.5k. Partner 2 has made 3,200 (didn't take a paycheck in April because with school and work he wasn't able to help out that month) plus half of the 12k the company made, so he has made 9,200. When you ask if the company has potential to grow, yes. The service aspect of it has potential as well as setting up different accounts with vendors and selling aftermarket accessories. Both partners have discussed these possibilities, only problem, p2 can't put in the time to learn how to service the machines or set up aftermarket accessory sales, his day job doesn't allow for it. p1 has the time, but no motivation to go after it because p2 wants the service money and the revenue from accessories put back into the business, so in a sense, he gets half of whatever p1 services or sells without doing it.

Disgo - your uncle in-law's partnership seems to have had a good ending. Scenario for you though: what if p1 and p2 agree to dissolve the partnership, but both want the business?

Just my 2 cents.

Should of never gotten involved in a LLC without laying who did what exactly. Why is P1 allowed to compete against the same company that they own together? If they split there is no company for P2. He does not have the skills to run it. THis is always the problem with small ventures. 2 guys put up money one runs it and then feels like the other guy is getting to much return without any sweat. At this point they would be best to go their own ways. If P2 had put up all the capital and P1 was just building sweat equity then P2 would have a leg to stand on but if P1 has enough capital to go it on his own P2 is just extra baggage. Could of P1 started it on his own without P2? If not and now P1 is using the increase from the LLC to go on his own then that is a little underhanded to P2.

If they decide they want to try to continue on they need an agreement stating the new plan...........

But after the boat has sailed it is tough to bring it back to port. P1 has now had the chance to see whether or not the business plan will succeed and sounds like he doesn't need P2.

I see an end in a friendship coming.

If P1 or P2 your relative? Oh and have they got any clean KTM's for sale?dit

Edit, if they are leasing how long is the lease and is the location crucial to the business? If it is then P2 may have some leverage there.

Mark

The lease is up in August. Location is not crucial to the business. It is just an open warehouse with a small 10X12 room for the office. The contract for the warehouse was for a year and that ends in a month. The contract for the warehouse is also in p2's name. P1 had the capital from the get go to do it on his own, he was just friends with p2 and brought him on for the extra help. Elaborate on the comment of p1 competing against the company that they both own? Do you think that since p1 is performing service on his own in the warehouse that they both own, it is undermining and unfair to p2 who is unable to perform service because he lacks the skills? Does p1 owe p2 a percentage of the service he performed on customers machines?

If he is doing work on the property that they both leased and it is in competition with the original company yes that is undermining to P2's position. Even under just the original verbal agreement whatever profits made thru the business and location should be split 50/50. Plus anytime he is working on his own projects he is not doing the work for the original company that he is being paid to do. The problem is now as I stated before P1 has seen that the business model will probably be successful and he doesn't want to carry a partner. Just by the numbers that you have thrown out P1 has realized to have a reasonable living he needs both his salary and the partners plus any profits that can be made.
Does P1 have credit problems where he could not sign the lease on his own?

No, p1 has great credit. The lease was signed by p2, i am venturing here, I don't know, because p2 saw he might need that down the road as leverage? It seems that p1 then owes 50% of the service revenue he recieved from service he performed on company time and building to p2. Now that begs the question, if p1 wants to maintain the current partnership simply for the sake of maintaining a frienship with p2, how should a new contract be written out. Is it fair for p1 to perform service and still pay p2 half of it? Should p1 simply pay a rental fee and utility fee to do service and keep the money? How about a percentage of the service to the business? The whole partnership hinges on coming to an agreement over the service aspect of it. P1 feels P2 isn't committed and doesn't have the skills to do service. P1 feels that the 2,500 he recieves from the business is only related to the money used to buy company inventory and recondition it. He doesn't feel like he should be required to give the service money on projects he personally does at the company building to p2. P2 is compensated 800 for the time he does put into reconditioning the machines, but feels that p1 is overcompensated because half the month p1 works 60 hours a week getting machines ready to sell, and the last half of the month, unless he is doing service on other machines not associated with the business, he pretty much has to think up creative ways to stay busy. So what is your take Mark if they did decide to make a go out of it and figure up a working contract?

Edit: what do you mean by competing against the original company? p1 feels that any machine that is bought with company money and needs servicing such as oil changes, valve adjustments or engine rebuilds, gets his service as part of his 2,500 salary agreement. What he doesn't agree with is that any machine brought in that is not associated with business capital is fair game to do service and recieve the revenue without profit sharing with p2. I kinda see it both ways. I think p1 has every right to go out and advertise for service, but I think you're right that p2 needs to be compensated somehow because the building and the lease is half of his.

IMO

Now I am seeing the picture a little better I think. They started out buying machines at auctions etc and then resellling them. Then P1 started doing service on other peoples motorcycles etc. If that is basically the case in my opinion still P1 is still doing work for the same company that has now expanded. He is using the companies building, power etc. Without the first business he probably would not have the opportunity to do the service now. They went into this deal knowing one had the skills and the other was just going to be a small participant. So nothing has really changed other then expanding the business. Let me ask a question, if all the gross profit was combined what % is coming from sales and what % is from service.
IMO, if they want to stay together all the revenue needs to be combined. If P1 is doing more work due to the service then the pay structure needs to be reevaluated. But from what I see at this point P2 doesn't have alot of leverage if P1 can capitalize himself and lease his own property.

I am by no means an attorney. Without a legal agreement why does P1 want to continue to carry P2 other than friendship? As with most things it comes down to money. I am suprised that P1 did not see this coming before they started, with or without the service part. If P1 can come up with the 50k and sign a lease P2 had better figure out what he can bring to the game or he's probably going to be out. (internet sales or something else) But at this point p1 should not be making extra coin on the same property. IMO

Mark

90% is coming from sales, 10% on service. From what I know, the service just recently in the last month took off. Before that, it was pretty dead. Other than the friendship, which will be destroyed if they dissolve it, it seems P1 would rather part ways than continue as is. Might be past saving though. Thanks Mark, I think i might turn both of them onto this thread and see if some drama unfolds :haha:

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Originally Posted by Reedus

I think i might turn both of them onto this thread and see if some drama unfolds :haha:

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That is a great idea, and quite funny.

I don't know have the answer for this situation but as you have presented the issue, I would tend to believe that P1 is putting more into this partnership and thus deserves more. I hope they find a amicable solution.