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R88128812
01-08-2014, 09:06 PM
Great forum. And thank you in advance for your input. I started a business with my mother over 10 years ago. Being my mother we don't have any partnership agreement. To keep it real simple she put up the capital and I put up the sweat. I have been president and operator of the company for 10 years. She has been basically a silent partner. I have gone to her from time to time for advice and she has spent a total of five days in 10 years actually contributing to the day to day operations. I have paid myself a fair salary based on my performance. Because of the economic downturn the business grew slowly but didn't show any real profit until last year, 2013. It has shown even greater profit in 2013. Neither of us have drawn any profit out. I have paid her back her entire investment plus 6% interest.

Now she wants to retire and is demanding I buy her out of the business. She wants 3.5 times profit. My stance is that I paid her back her investment. She was a silent partner and therefore is not entitled to more than her investment plus interest.

What are your thoughts?

Is it typical that a non working investor will recoup their investment, plus interest, plus half the value of the company?

I feel that because I put up the sweat and she put up the money then its a 50/50 split. I would pay her 50% value. But sense I have already paid her back her investment than I only owe her the difference between her investment and the 50% value.

Please shed some light on this. I am trying yo honor my mother but also protect my future and my children's.

Thanks so much.

Freelancier
01-08-2014, 10:17 PM
3.5x profit is what a normal business is valued at. Sounds like Mom's been watching a bit too much Shark Tank.

I think you need to sit down and talk to her. This isn't about the money, it's about your relationship with her. That's the most important thing to come out of this.

vangogh
01-09-2014, 12:12 AM
I agree. First and foremost this about your relationship with your mother. The money is secondary. Whatever you give her, a successful business is going to give back to you. What you might lose though, is something you can't get back.

As far as how much money you should give her to buy her out why not just take her suggestion of 3.5 times profit and your thought about owing her the difference and meet somewhere in the middle. If your partner wasn't your mother I'd be inclined to think your price is right. Usually with a silent investor they invest and their return is profit from the business. If you paid back the investment with interest then it was more getting a loan than having a silent partner.

The thing is your partner is your mother and that's more important. If you're a typical family then in time you're going to to be taking care of her, which might include financially if she needs the help. If she doesn't need the help then her finances would likely end up with you in time. In other words whatever you give her now is money that probably either comes back to you later or is money you would likely spend on her at some point.

phanio
01-22-2014, 08:06 AM
I disagree - family is family until it comes to business. Your mother already showed her side of this by being greedy.

There has to be another way. Maybe agree to an annuity over a set period of time that makes both of you happy - say 25% of the monthly profits until a certain amount is hit or over a set time frame. Might be the best way to get her out of the business without losing our (outside the business) relationship.

But, these two things - personal and business - has to remain separate as best as you can - that is why so many people will tell you get an agreement in place first.

vangogh
01-29-2014, 01:50 AM
personal and business - has to remain separate as best as you can

Too late. The time for that was before going into business. Once that happened they were no longer separate. Regardless of what happened and whether or not the mother in this case is being greedy, I would hope the relationship is still more important than the money. The money can be replaced. It can be earned again. The relationship might not be repairable depending on how this turns out.

Harold Mansfield
04-29-2014, 04:31 PM
Great forum. And thank you in advance for your input. I started a business with my mother over 10 years ago. Being my mother we don't have any partnership agreement. To keep it real simple she put up the capital and I put up the sweat...
Now she wants to retire and is demanding I buy her out of the business. She wants 3.5 times profit. My stance is that I paid her back her investment. She was a silent partner and therefore is not entitled to more than her investment plus interest.

What are your thoughts?


You already answered your own question. You said that she was an investor...actually the only investor. Not a lender. Who do you know that invests money in a business only to get their money back and not expect to share in the profits? No one. The investor has every right to share in the profits and if she takes you to court you will not only lose, but may lose much more of your share than you think you own.



Is it typical that a non working investor will recoup their investment, plus interest, plus half the value of the company?

Yes. Banks lend for interest. Investors do it for profit and ownership. Period. Doesn't matter if they never do a days work in the actual office, they put up the money or there would be no company.


I say treat your Mom right. She believed in you when no one else would give you the money ( or else you would have gotten a loan) and now you want to cut her out of the spoils of what her money allowed you to accomplish? Not cool man. She didn't owe that to you.

I say get a lawyer to get a fair valuation of the company, and make a deal with her.

Not sure that she deserves 3.5x's it's value though. That seems pretty high for a 50% stake buy out. Especially if her initial investment has been paid back with interest.

MyITGuy
04-29-2014, 05:19 PM
Now she wants to retire and is demanding I buy her out of the business. She wants 3.5 times profit. My stance is that I paid her back her investment. She was a silent partner and therefore is not entitled to more than her investment plus interest.

Is it typical that a non working investor will recoup their investment, plus interest, plus half the value of the company?

I feel that because I put up the sweat and she put up the money then its a 50/50 split. I would pay her 50% value. But sense I have already paid her back her investment than I only owe her the difference between her investment and the 50% value.


Am I missing something here...where is 3.5x profit equal to or greater than 50% of a company value?

Considering that an agreement was not signed, the funds were not a loan and were a condition of her being a silent partner, and this is an immediate family member its best to discuss/work it out with them...but I'd be inclined to try to negotiate to 3.5 times of 50% of the annual net (Not gross) profit.

gaseousclay
05-08-2014, 09:15 PM
I'm with Harold on this, your mom put up the money for your business which makes her an investor. It doesn't matter that you're doing all the work - you wouldn't have any work if it wasn't for your mom's money. And now that you're becoming profitable it sounds like you want to cut her out of all future profits. That's pretty low IMO. Your mom should be entitled to a cut of all future profits in perpetuity unless you buy her out at her asking price. It doesn't matter that you've paid her back what she invested plus interest. Technically speaking, if this went to court I wouldn't at all be surprised if they rewarded the entire business to her. She invested the money which makes you an employee