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Partners: Breaking Up Is Hard To DO

Crouser Report OnLine March 29, 1996

Okay, we give in. By popular demand, our only new Performance Group this year will open in Orlando, Florida instead of Chicago this fall. Our groups are a combination of on-site visitations and meetings which focus on creating a high level of performance. For more information, see the end of this message.

Transmitted from the Great State of Mississippi

So, I m between planes in Cincinnati headed from Iowa to New Orleans and then to Florida and needed to catch you up on your mail. Man, do I ever! We ve been on the trail so much that Bob Dole calls me Tom now. Well, let s just take this letter about partnerships and dive in. Subj Partner leaving
To: TomCrouser@aol.com

A design firm I am involved with is owned by three partners. One of them has announced he feels it is in the best interests of everyone that he leaves,and so has asked to be bought out by the others. Everyone wishes to end things amicably. The leaving partner will continue to be in the business,likely on his own freelancing and potentially competing for the same clients.

I am interested in opinions on how this type of breakup is done amicably and fairly and ethically. What is a fair price for his shares? What is the best way for the company to pay out for his shares over time? What is fair regarding future cooperation (subcontracting) and competition and trade secrets?

What about the name of the firm (which currently includes all three names)? What is the best way to reassure customers? suppliers? the bank? What happens at the bank where this partner has put up considerable collateral against the line of credit? How quickly should he leave?

For obvious reasons, I would appreciate you let me leave this query anonymously. Thanks in advance for your prompt advice.

Dear Anonymous. Wow! Breaking up is always hard to do. Well, let s take these questions one at a time. First, you are involved in a partnership. Now, I will assume this is a true partnership and not, like a sub-S corporation where you are just saying partner. Well, what can I say about a true partnership that is positive? Hum. Nothing. Don t do it. Don t do it, again. Why? Many reasons. But, here s the first. When one partner doesn t want to play anymore, then the partnership is dissolved. Kaput. Finished. That s what has happened in your case. So, Dole, Gingrich & Clinton no longer exists. Dole & Gingrich may wish to form a new partnership and continue on, but & Clinton has taken a walk.

So, the name in many states has to be changed for a partnership must reflect the names of the partners unless you are doing an alias business. But, why would Dole & Gingrich wish to continue to promote Clinton? I don t know.

What is the best way to reassure customers? Well, Dole & Gingrich had better be toe to toe and eyeball to eyeball with customers. Now, as far as reassurance, it sort of depends upon what Clinton was doing. If copywriting, then Dole & Gingrich had better be discussing how they are going to handle the copywriting under the new scenario. Unfortunately, in these types of partnerships, various talents lie within the principals and this is sometimes difficult to do.

Now, as far as cutting up the baby goes, you and your partner want to buy out the third partner. How much? The partnership account in owner s equity tells specifically how much is due each partner. So, Clinton s part is $30,000. Pay him from the cash in the company (he he). Oh, so you don t have that much! Well, the partners could contribute and then the amount of contribution would add to the capital of each partner and a new income distribution method be adopted under this arrangement.

What if the partner wants more than what his partnership equity is? Shocked. I m shocked at such behavior. Okay, pay him or dissolve the partnership. Negotiate. Threaten. Cajole. Sue. I didn t tell you partnership breakups were pretty.

Okay, so we dissolve the assets. What does that mean? Turn the file cabinet into cash and divided up the cash left over after paying everyone. Now, like in a good divorce, turning the dog into cash isn t usually a logical thing, so some bartering would help. Trade you one filing cabinet for half of a desk. Not pretty, but I m not the one who said partnerships were a good idea.

And, by the way. Should the partnership accounts show negative numbers, then each partner puts in the required amount plus sell off the assets and, if that is not enough cash to pay off debts, then the partners are each assessed an additional amount to make up the difference in the same proportion as the earnings were distributed. Makes me wanta go start a partnership right now.

Now, you mentioned the bank. Well, when you opened your checking account, the bank had you sign a partnership resolution which said that all of you owned the account, etc. Nice thing about banks. Should they find a partnership dispute is going on, they would possibly freeze the account until everything is settled and a new partnership agreement is signed by all parties telling them what to do with the cash. If nothing is forthcoming, they would wait until the court settles it which could be a long time.

Then you mentioned loans. Since the partnership is dissolved when one partner yells I quit! , the bank also calls the loans, typically. If there is not enough cash to pay the loans, then the collateral is called and sold. However, as a negotiating position, your hand is strengthened for the one partner wanting out has put up the equity for the loan. Normally, the loan would be closed and the remaining partners would refinance. If that is not possible, you may be able to negotiate with the leaving partner. If you all can t agree, then the bank brings down the partnership by calling the loan or the partner does by disavowing the loan (although that would forfeit his collateral). Nope. Still not pretty.

But, back to your question. You write, I am interested in opinions on how this type of breakup is done amicably and fairly and ethically. Short answer: negotiate a settlement all can live with. If you can t, kill one of the partners and keep negotiating (just kidding). You also write: What is a fair price for his shares? Book value is shown in the partnership account. Anything plus or minus that comes from negotiation. You write: What is the best way for the company to pay out for his shares over time? The leaving partner doesn t have any shares, he has partnership equity. Difference is, partnership equity can bring down the empire while shares can t although they can result in shareholder suits. Now, how much and how long is a negotiated thing, mainly depending upon the price and the amount of capital in the partnership.

You ask: What is fair regarding future cooperation (subcontracting) and competition and trade secrets? My first response is, not much is fair. But, once again, a negotiated settlement is in order. I would assume you would not want him to compete for the business of the partnership in exchange for cash or the promise of future work or something else he will buy into. As far as trade secrets, there are little, if any, in this situation, in my opinion. Customer lists are not trade secrets. Historic pricing is not for that can be changed at a moment s notice. So, what is left? The ability of the principals to design? One may be able to argue one or more of these points, but not very successfully in my opinion.

Now, how quickly should the one partner leave? Probably the sooner the better, but there is no rule. Again, part of the negotiations.

Doesn t sound pretty, does it? It isn t. For those of us not in partnerships, I have one piece of advice: don t. And good luck to those who are dissolving them.

Tom Crouser

Performance Groups



Our performance groups consist of non-competing printing companies who qualify for their position in the group via on-site evaluations and a desire to perform. Once qualified, the group meets twice a year (September and March) in Orlando, Florida. For the meeting, our staff prepares a complete financial analysis on each company and a report on each company s most recent evaluation is distributed to all.

Companies receive an evaluation rating based on the visitation evaluation. Companies rated in the highest category must undergo additional evaluations once every eighteen months. Companies rated in the second group are evaluated yearly. Third and fourth category companies are rated every six months.

While the meetings have a strong component of reporting of performance and sharing of experiences, there are a number of educational sessions as well. Typically included are sessions on families in business together; finance; sales; organization; data base marketing; quality management; supervision; and other topics. In addition, performance goals are set and participants are measured as to their accomplishment of their goals at the next meeting.

During the on-site visitations, much attention is paid to workers. Generally, most are interviewed to obtain their input on changes needed. Also, owners evaluate personnel and various personnel issues are addressed.

Performance Group participants also receive priority status for registration at the 1996 Production Manager Conference to be held in June and the 1996 Sales Manager Conference to be held in August. Additionally, all group participants will be invited to our annual owner s retreat scheduled for January 1997 in Miami, Florida.

For more information, message TomCrouser@aol.com with your name and telephone number and we will call you to discuss more details.

Crouser & Associates - Helping Printers Prosper Since 1985

Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.

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Date inserted: Saturday, March 30, 1996 3:38:36 PM Return to PrintUSA home page WWW at http://www.printusa.com.