My business is an S-corporation and I have a partner. My partner is very sick and needing a liver transplant. He has been unable to work for over a year, and I am not sure when or if ever he will be able to work again. But we still make the same salary. I offered to buy him out, but he wants twice what I offered which is about the value of the whole business. He is going on disability so he wants me to make his wife vice president so he can still get the paycheck. What should I do?
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3please don't use all caps plus could you give us some more information please, such as whether you have key employee insurance on him, whether his wife could do at least some of the work that would be required, whether he could have essential theoretical input from his sick bed, is his medical insurance part of a company scheme which he will lose if he is no longer working, what is the company actually worth now compared with when you became partners?– MD-TechMay 12, 2015 at 13:38
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10In your incorporation agreement how does it state you will handle decisions upon which you do not agree?– MylesMay 12, 2015 at 19:13
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Is an s-corporation only a US thing or do other countries have S-corporations too? (aka should we tag this united-states?)– Alex BMay 14, 2015 at 18:09
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4 Answers
The best partnership agreements cover all contingencies often referred to as the 5 D's: death, divorce, drugs, disinterest, and disability. Most do not, however, which makes them such a mess.
I was an employee of a firm that went through this, and it is not pleasant from anyone's perspective.
Of course you don't have that option now.
Your best bet is to talk to a lawyer and find out your options. For example, would it be best to form your own company and do the same thing? Would it be best to give your partner double as your legal fees are likely to be higher then the inflated value? Could you offer a one time fee and revenue over time in lieu of the one time buy-out?
It is likely to get ugly, and one thing that contributes to this is the emotional turmoil that your partner's family is going through.
Did he say why he wants double your asking price? Did you explain to him how you came up with the offer you made? Sometimes exploring interests (why people make their decisions) is more helpful than bargaining over positions.
If you understand why he wants double your offer (and he understands why you're offering a lower price) you might get closer to an agreement.
Another option is to defer to a disinterested third-party who will pick a valuation for the company, and you can agree to abide by their decision (and pick a payout schedule if necessary)
Think about what you'll do if you can't come to an agreement: is walking away from the business an option and going out on your own? What would happen to him if you simply walk away? It might be in his best interest to negotiate. Or will you reluctantly pay his asking price?
Or can you sell the business to him? One option when partners need to split up is to have one of them set a value for the company, and the other decides if he wants to be the buyer or seller. (It's like the trick with kids where one cuts the cake and the other selects which slice he wants.) Maybe you can come up with a fair way of valuing the company.
A lawyer will be needed to draw it all up, but you can agree on the framework of the deal ahead of time and save some money and stress.
Last thought: when a win-win agreement isn't possible, sometimes the next best compromise is where everyone feels like he got equally screwed. That's ok, too.
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7The buy-sell agreement you are describing is often referred to as a shotgun clause May 12, 2015 at 21:48
Many partnership agreements include a shotgun clause: one person sets a price, the other can either buy at that price or sell at it. It's rather brutal. You can make offers that you know are less than the company is worth if you're sure the other person will have to take that money from you, say if you know they can't run the company without you.
He has asked for $X to be bought out, and failing that he would like to keep owning his half and send his wife (who may very well be competent, but who among other things has a very ill husband to deal with) to take his place. If he can occasionally contribute to the overall vision, and she can do the day to day, then keeping things as they are may be the smart move. But if that's not possible, it doesn't mean you have to buy him out for twice what you think it's worth.
In the absence of a partnership agreement, it's going to be hard to know what to do. But one approach might be to pretend there is a shotgun clause. Ask him, if he thinks half the company is worth $X, if he's willing to buy you out for that price and have his wife run it without you. He is likely to blurt out that it isn't worth that and she can't do that. And at that point, you'll actually be negotiating.
answered May 12, 2015 at 22:03
It maybe an option to ask if he has a friend who will cover his workload if he wants to continue the business. This way somebody will at least do some work for his share of the workload. That being said the person who covers him will need to know what they are doing.
