Here is a real situation that has a partnership of four up-in-arms:
Each partner owns 25% of the business. Three of the four partners have stellar credit and decent net worth. The fourth partner had a bankruptcy 4 years ago and does not have much net worth, other than the value of the business, to speak of.
The company has a customer present an opportunity to them to double their business in 12 months. The catch - they will need to buy over $1,000,000 of equipment to capitalize on the lucrative opportunity. Even though the credit markets are tough, this company is able to secure the financing it needs under one condition - the three partners with good credit have to guarantee the loans, but the fourth partner cannot.
The three partners have exposed themselves to more risk than the fourth. So, is the partnership still actually equal? Not in terms of risk.
In this scenario, the three partners are fine to expose themselves to this additional risk to give the company a chance to grow. They do wonder, however, if they should in some way receive compensation for taking on more risk than the fourth partner. If for some reason the company defaults on the loans, then the three who signed personal guarantees will have to resolve the issue eventually with the creditors. The fourth partner gets to walk away without these issues.
I have seen some interesting ways to handle this issue, and I would welcome additional feedback on how to best handle this. Any and all ideas are welcome.
One last thought - if anyone is considering taking on one or more partners in their business, this is an issue that should be considered and can even get in the way of financing your business. If your partner owns at least 20% of the company, some lending institutions will require that they run a credit check on them - and if their credit is bad, the lender will probably decline the loan!
ADDITIONAL COMMENTS
I received some great feedback on a social network for startup CFOs that I wanted to add.
Mark McLeod, part-time CFO, says:
Interesting situation, Ken. You could approach this a few ways:
1.) Risk adjusted return on the leverage the 3 partners are taking on: some additional premium either as a % of the loan or non equal distribution of profits from the incremental business
2.) Separating the legacy and new business on paper and again having unequal profit split on the new piece.
3.) Re-evaluating whether this 4th partner is necessary for the future of the business. Will he drag them down or can he be an equal and full contributor?
Peter Towle says:
Another option to explore IF the other partners want to keep the 'bad-credit' partner in as an equal profit participant (or try to keep it equitable) is to create a side agreement between the partners that encumbers the 'bad-credit' partners assets, future assets, or share of the business should there be a problem.
Great feedback so far...I'm open to more ideas, thoughts, and suggestions!
Ken Kaufman, Founder & CEO
CFOwise
CFO services
CFOwise is the premier CFO firm for start-up, emerging, and medium-sized companies
Article Source: http://EzineArticles.com/?expert=Ken_Kaufman
Article Source: http://EzineArticles.com/2677082
No comments:
Post a Comment