How to get rid of a bad partner ... legally
So you went into business with a partner a couple of years ago. Things went well for a while, but now your partner is “acting up” – not showing up for work on time, taking unscheduled days off, not pulling his or her share of the workload.
It’s probably time to get rid of your partner . . . but how?
Hopefully, when you formed this business, your lawyer drafted an agreement saying exactly what would happen in a situation like this. The technical term is a “buy-sell agreement,” but it may have a different name: For limited liability companies (LLCs), it’s called an “operating agreement,” and for corporations it’s called a “shareholders' agreement."
Look for a section with the word “removal” in the title. If there is such a provision in your agreement, it will tell you how a partner can be removed, the vote required to remove your partner (if you own less than 50 percent of the company, you may have to get another partner to go along with you), how much you will have to pay the removed partner for his ownership interest and so forth.
If there is no such provision in your agreement, or if you don’t have an agreement with your partner at all (shame on you), call your lawyer. State law may dictate what you need to do to oust your bad partner. For example, if he has been convicted of a crime, you may be able to oust him without having to pay him anything.
If all else fails, you will probably have to swallow hard and offer your partner some money to go away. When someone owns a piece of your company, the only legal way to get rid of them is to buy him out for a price he is willing to accept.
If your agreement does not specify the buyout price, you will have to offer him something close to the “fair market value” of his shares. Generally (although not always), that will be a multiple of your company’s earnings before income taxes, depreciation and amortization (EBITDA for short).
Talk to your accountant or financial advisor and have her calculate your company’s EBITDA for each of the past three years. It’s a complicated calculation, so rely on them to come up with the amount you should consider paying for his shares.
To minimize the impact upon your business’s cash flow, offer to pay the buyout price in monthly installments, with interest, over a period of three to five years.
Of course, there will be some negotiation, usually over the correct multiple of EBITDA that should be used to determine the buyout price. You may have to offer your partner more than you think he should get. But in the long run, a partner who’s not pulling his weight is like a tumor that must be removed, whatever the cost, to ensure the future success of your business.