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Thread: How to exit a cc gracefully...

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    How to exit a cc gracefully...

    Hi

    I've been reading some excellent advice on this forum, and I truly hope you are able to give me some guidance.

    I am a 45% member in a CC (2 members). We have had 6 years of excellent partnership, supporting each other and seeing our little business grow from R200 000 turnover to over R5million in that time.

    In the CC, we own 2 properties (or rather, the bank owns them - very little equity) and approximately R400 000 in (real depreciated value) equipment and vehicles. When I became a member, I was required to buy shares over from a previous cc member, for which I have a company loan, approx. R300 000. I also have a personal loan from the company, for R80 000, which I have been paying back on a monthly basis.

    I want to leave, and am worried that I won't be able to... I do have an Associates Agreement, meaning that the member's share remains at the same price as when bought. Does that mean that I can simply 'give' my percentage to my partner, who then takes over the debt to the CC?

    Of course, I do not want to have to pay the R80 000 loan - especially as I have taken a massive salary cut in these trying times. And I'd really like to take certain equipment (which only I am qualified to use - audio/video production stuff) with me, to the value of R87 000.

    What I'd like to know is this: Would it make sense for me to leave, i.e. not work there anymore, but continue drawing a salary, which I would then pay straight back into the company - thus paying off my debt? This would save the company more than R200 000 (instead of continuing to pay my salary). I would then be happy to cede my percentage to my partner, meaning that - for paying around R70 000 in taxes - he would be free of that awful burden, the silent EX-partner.

    I really want this company to do well, and for my partner to be as unencumbered as possible. I also don't want to shoot myself in the foot.

    It all seems highly confusing at the moment, and I'd greatly appreciate any advice that more experienced business people could offer...

    Thank you!

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    Site Caretaker Dave A's Avatar
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    The key to graceful exits is to find a win/win solution.

    Most often it's doable when the goodwill is intact, but in trying to pull all the elements together from your post, there are a few things that trouble me.

    On the plus side, the Associates agreement could probably be altered by consensus among the associates, so it's not necessarily an obstacle to an amicable parting of ways if the terms can be agreed between you.

    For example, your partner could buy you out for the value of what you owe to the company, effectively paying you by taking responsibility for your loan account. No money changes hands and as long as this is less than what you bought the interest for, there's no capital gain to be taxed. If there's space, perhaps it could even include you "buying" the equipment you want too - but it will simplify things if that aspect is dealt with as a separate issue.

    The sort of stuff that's troubling me is:
    • Why do you want out?
    • Are you a surety (particularly on the property finance)?
    • How will you leaving affect the bottom line (Is losing your salary as an expense really going to translate to profits)?
    • Why would you be entitled to a salary as a non-working member?
    The trouble with opportunity is it normally comes dressed up as work.

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    McCaffrey (28-Oct-10)

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    Hi Dave

    Thank you for taking the time to answer. I really appreciate it.

    The reason I want to leave, is that my partner has become 'the boss'. Where we were once good partners, he no longer consults me on any major decisions, and ignores me completely when I do have opinions or objections. The CC is currently in a fairly dire state, thanks to losing several major clients in this difficult year.

    It was agreed three years ago, that my primary responsibility would be the creative and production side of the company, which I have grown hugely in that time. He oversees finance and office management. But as the company has hit hard times, he has become increasingly resentful that I am doing the 'fun' stuff, and that I work mostly from home (which is because I work a minimum of 80 hours a week!).

    Given the hard times, I was not surprised when he informed me 2 weeks ago that our salaries have been reduced from R50 000 to R35 000. Today, he informed me that my salary will now be R25 000. This means that I will have to go into debt counselling immediately, which has terrible consequences for the CC. He is, I think, hoping that I will just leave... As I said, I was not even consulted on this new financial decision - and as I only have 45%, I assume he has the right to do that. I HAVE signed surety on the properties, I'm afraid. I am so not willing to sign my name to anything more, that I have no say in whatsoever.

    Of course, I could just default on all my personal debt. I have no house in my name that the debt collector's can come after. And living without credit is not the end of the world - I've done it before. If I go into debt counselling immediately, I can give myself and my family a chance of making it through the next year.

    As to collecting a salary when not working, I meant more that I would be happy to take an extremely reduced payout for my member's share, divided over many months, to make things easier on the business.

    At this point, though, given the extreme emotional reaction of my partner, I need to figure out what the best thing is for ME. I'm less interested in being gracious now, than in being sensible, and not allowing my partner to take advantage any further.

    Again, thank you for your advice.

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    By the sounds of it you both want you to leave. All that has to happen now is decide on the terms.

    You want your debt written off, some equipment and to be released from your sureties.
    He possibly wants your share of the cc and to be released of the cash flow burden of paying you a monthly salary, plus ... what else?

    I can't comment on his view based on the above as you did not elaborate on why he wants you out. But what ever these reasons are, they are bargaining points in your favour.

    From what I can gather, the loan account debt shouldn't be a major issue. If he wants you out and he knows you're in financial trouble, he's probably already written that loan off in his head.

    The equipment may take some convincing, but he probably faces some problems too if you are sequestrated. Not an expert in this, but he may run into issues with the cc having to be liquidated to pay off your debts. Releasing equipment of no use to him and writing off a loan with no real prospect of repayment may be a small price for him to pay in order to not have to deal with a business partner's debt forcing a liquidation.

    Think of it as payment for a severance package and for the shares.

    The sureties on the other hand will most likely come back to haunt you in the future. I'm not sure how to deal with those.

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    Thank you, BusFact. Yes, the surety issue is one that worries me, and that no-one seems able to give me a straight answer on. The sureties were, however, given on the basis of completely honest financial information on my part. I literally have no personal assets of any real worth, so what do I have to lose? As it is, I put my foot down and refused to sign for an absolutely horrific deal that was essentially loan-sharking for businesses, and would have hasn't the crippling of our company.

    My partner doesn't SAY he wants me out. He has just steadily removed me from all decision-making. Today, he retrenched staff without telling me, too. So it's pretty clear that I'm already 'out'.

    Do you perhaps know whom I could talk to for accurate advice on the issue of my liability, should I go into debt counselling? I know that I will be prohibited from acting on behalf on the company, which doesn't bother me, as I'm leaving anyway.Is there any official body that helps people like me, who can't afford hectic lawyer's fees?

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    Gold Member daveob's Avatar
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    Go see a lawyer.

    And I would use that strong possibility of impending financial ruin as leverage to close the deal quickly - your partner would probably want to be rid of you and cut ties before the brown stuff hits the fan and affects the company - use that to your advantage.
    Watching the ships passing by.

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    McCaffrey (29-Oct-10)

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    Gold Member garthu's Avatar
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    This is going to be trying. The lawyers would be the correct way, however they normally score more in case like this than you. When i did this my ex partners, they really acted as arbitration and then got paid well for it

    My personal thoughts would be to try and get rid of those 2 properties if possible to rid of the surety and if cash flow is so strained at the moment, i cant see why either would be in disagreement. Nothing worst than "investment" killing cash flow in my mind.

    The surety issue is the only one thing that would bother me. Try to convince him its the right way to go. The rest is for haggling and what is what is at the end of the day. If you manage to agree on the surety and property, then do what you can to keep it of legal and settle. I have spent way to much time in legal proceedings for various reasons to EVER suggest it to someone... it really must be the last option
    Garth

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    We do have one property on the market, but even at a seriously reduced price, it isn't moving... Thank you, all, I will be seeing a lawyer on Monday. Some things are unavoidable!

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    Thank you all for your excellent advice and support. I'd just like to update you with the following:

    My partner (as I said, an emotional person at the best of times, and this is not the best of times!) has calmed down, and we have reached an agreement. My director's loan and shares will be ceded to him, and I will walk away debt free, and with the equipment I need to start my next business. In the meantime, he will continue to pay me the previously agreed reduced (but manageable) salary, but my paying me as a supplier, thereby reducing his tax burden, and making me happy....

    ...as I've just realised that I now qualify for the Turnover Tax option, which will save me at least R150 000 a year. Wow. Which, in turn, means that the number of clients I need for my new business has been radically reduced.

    My thanks are for this - I gained a great deal of confidence from reading other posts on this site, and feeling that I was not alone through this difficult situation. That enabled me to be calm, and to negotiate from a position of knowledge, rather than panic.

    I'm sure I'll be asking lots more questions as I head into the realms of doing business on my own. Can't wait!

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    Site Caretaker Dave A's Avatar
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    Well done McCaffrey. I sincerely hope it works out well for both of you.
    The trouble with opportunity is it normally comes dressed up as work.

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