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My husband went into business with a gentleman who seemed to be very clued up (he's an accountant). He has numerous other businesses and was able to open doors that we would never have had access to in order to start up our business.

On his suggestion my husband became Company Director while he took the role of Company Secretary. The business needed a capital injection in order to get it up and running which he estimated/forecast at £45k. He is well connected and managed to secure a loan for this amount.

For seven weeks my husband was alone in overseeing the refurbishment (it was a pub opening) and opening of the bar, something he had never done before. He worked for 7 weeks on this, doing 14-17 hour days, 7 days a week and never took a penny for the work. He kept the 'partner' up-to-date on spend every day. Some of the purchases (£13k) were paid for direct from our savings which we fully expected to be matched by the partner in order to have cashflow now open. We went slightly over the spend budget but not on anything that was not needed (builders extra costs due to bad weather etc).

After asking the partner how he wanted to proceed with regards to his input into the company and fears over cashflow he has replied that he is not liable to pay anything in (he paid the builder £10k but took the money straight back from the loan company into his own account without it hitting the company account). He said, if there is a cash flow problem, that is our problem not his, that he would expect us to input a further £25k at least to keep it afloat.

He outlined his brief that he has done his part of the job (premises location, bank set-up, finding company to loan money etc) and for this he expected no input from him PLUS 50% share into the company. This would mean that we would be placing over £35,000 of our own money into the company with no debt to him and that he would still retain 50% of any profit - this was never outlined to us until after the fact. This seems totally unfair.

We are new to this and probably too trusting, but we just need to know where we stand. We cannot afford to fund this whole business on our own and will probably have to walk away. My husband thinks that this was always his plan, as he is well placed with the company that loaned the money AND the person who sold the lease. My husband thinks that he is hoping we will walk after setting everything up, getting the place up and running and spending all our money. He can then just walk into it (he has the money) with no input at all and take it from there...

I hope someone can help us.. We are going to seek legal advice of course but this is our first step...

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What happened afterwards? – Chris... S... Jul 31 '11 at 13:09

3 Answers

up vote 16 down vote

This is hard to write an answer to, really. On the face of it, going by what you describe, yes it would seem that you're in the hands of a predator.

Clearly, since you and your husband are talking about the business partner in these terms, there is a problem. If nothing else, then there is a loss of trust so severe that it threatens the business.

You must absolutely obtain good counseling. Hire a good lawyer who is specialized in corporate affairs, and perhaps see the local entrepreneurship community if there is one.

What mainly triggers my attention is the disconnect between the deal terms as you initially understood them, and as he outlines them later on. Now getting 50% just for securing a loan, finding a lease etc, that seems way way too high. But in itself, if you guys knew you were signing up for this, and were okay with it at the time, then it could be accepted.

But your description seems to say that it "sprung as a trap", that you suddenly became aware of having signed away lots of things you didn't know you had. That is of course not ethically justifiable.

My initial suggestions to you are:

  1. Start securing "evidence". Find all written agreements, emails, emails from private accounts, papers, anything that can be admissible in courts.

  2. Read through all this material. Create an index of what information is where. Take the most important things with you to a lawyer. Be sure to include both what is good and bad for you. You must provide your lawyer with an un-biased selection of materials to work from. If you don't, he may give you bad advice.

  3. Think about support network. Do you know any smart people with experience in similar matters who can help you with advice in this situation? Ideally they're not nearest family (too emotionally involved, will always side with you). It's better if they're not too close to you personally. Get them involved now, discretely.

He outlined his brief [...] for this he expected no input from him PLUS 50% share into the company.

(My emphasis on "expected"). Is it possible that you have not signed away ownership to him? Could it even be one giant misunderstanding, where he is asking for a high ownership percentage, but is expecting to be negotiated down to something more reasonable before the final agreement?

but we just need to know where we stand.

Sorry, but we can't tell you. In your explanation above, you're not giving any specifics about the contracts you have signed. Any answers we write here are best-effort guesses, based on the few facts you have provided. So we're back to assembling the materials that document your deals (contracts etc), and go see a qualified lawyer.

I'm not presenting any clear-cut solutions. Since you don't even know who has signed for what (i.e. who is liable for the rent, the contractor's invoices etc) that would be premature.

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I'm not sure how non-US companies work, but in US companies, the secretary is in charge of all the company's corporate minutes and legal documents. If that's true where you are, you need to get access to the minutes, in particular, and make copies (preferably notarized) to make sure he doesn't insert something fraudulent later. If he won't give you access to the minutes, you will know something's very wrong and you need to immediately talk to an attorney. – Bob Murphy Jan 2 '11 at 5:39
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It also sounds like you and the accountant had a lot of verbal agreements that weren't written down and your positions now differ on. If that's true, he's in as bad a spot as you. For instance, unless you and he agreed in writing that he gets 50% of the business for what he's done, there's no reason for him to get that. – Bob Murphy Jan 2 '11 at 5:47
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Have you issued stock yet? Do you have shares? Does he? If you have shares and he doesn't, you could theoretically hold a special stockholders' meeting and vote him out as secretary. Of course, if he has shares and you don't, he could do the same to remove your husband as director. And if his role as secretary is what it normally is in the US, he's the person who issues shares. If he has it in for you, you're really in a pickle. – Bob Murphy Jan 2 '11 at 5:49
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It sounds like you've put a lot of money and work into building out the pub premises, and you think this accountant wants you to fail so he can take over the lease and gain the benefit of all that. If that's correct, you should check into what your lease and local laws say about what you can remove or demolish from among the premises improvements. That way, if the pub fails, perhaps you can sell what you can to recoup some of your losses, and on other things not let him have the benefit. – Bob Murphy Jan 2 '11 at 5:55
@Bob Murphy: Great comments. You could put them into a separate answer; they kind of deserve that. :-) – Jesper Mortensen♦ Jan 2 '11 at 13:02
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up vote 6 down vote

This blog post from the E-Myth blog called The Art of Partnering is a very good summary of what you need to do when you plan to partner with one of more persons.

I will add my three rules I try to apply for every partnership I do:

  • Define in a written document when and how a partner can quit the company (details below).
  • One of you has to be the boss. You can't direct a company having mutliple CEOs.
  • It helps when one of you has the majority of the shares.

The first rule is the most important of all. I generally suggest this to the future partner:

If one of us wants the other to leave the company, he has to propose to the other an amount to buy his shares. The other has the right to either accept the offer or buy the one shares at the same amount he originally proposed.

This system has two advantage:

  1. it forces the parter to do an honest offer.
  2. it is easy to implement.

Regarding your current situation, don't accept it. Propose him the deal I suggest above. If he doesn't accept, please ask advices to a lawyer.

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Pierre thank you so much for this, those two sites are very interesting and I will be spending my afternoon looking through it. the horse has bolted unfortunately. We are meeting on Thursday and I will draw up necessary documentation as you have suggested - I am hoping that worse case scenario will be that he suggests selling the company or buying us out, which would be a shame, but at least not a financial loss. Both my husband and the partner own 50 shares each. I will be contacting a lawyer as soon as the holiday period is over...thank you for taking the time to help – Rodders Jan 3 '11 at 14:44
Also please check if there is a local mediation service in your state. I used that service few years ago, and it worked pretty well. – user3997 Jan 3 '11 at 14:46
Cool, I will check that out...thanks – Rodders Jan 3 '11 at 14:55
up vote 2 down vote

You will need to document, document, document. It sounds as though the situation may eventually require arbitration or litigation, and any legal decision will fall back on a "contract." Whatever was verbally understood should be written down, discussed, negotiated, and eventually agreed upon and executed by both parties. You may find that you will be in a better position to negotiate with legal counsel, but you may want to see if you can sit down, come to terms, and work out a written agreement.

It's never a good idea to operate a partnership, to invest your energy and resources--business or personal--without an executed agreement. Either both parties can create it, or the legal process will eventually create it--and that is a much more expensive process.

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Cindy thanks for the advice, luckily we have all correspondence between us and can use this. You are right, it probably will go to litigation, but I would rather that that let someone like this ruin all our dreams without being answerable to parts. We have asked for a meeting this Thursday to try and talk things through and find out what his end game is and in the meantime I will be enlisting the services of a solicitor. Again, thanks for taking the time to help.. – Rodders Jan 3 '11 at 14:50

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