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Patrick H.
Patrick H., Lawyer
Category: Australia Law
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Experience:  Dip Law LPAB - Sydney based lawyer
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Business partner disputes

Resolved Question:

My business partner and I are in dispute and we can't agree on a price for me to buy her out. The business is gelato and coffee and has been trading for one year with a net profit of $30000 without any wages paid to us. A broker valued the business at $10-15000. They think it is $70000. She owns 60% and I own 40%. I do not want to pay them $45000 as it is not worth this. She has stated that they will call in a receiver to sell the business. What are my rights?

Submitted: 5 years ago.
Category: Australia Law
Expert:  replied 5 years ago.

Unless there is provision in a partnership or shareholders agreement for the exit of a shareholder or partner from the business, there is no simple formula or solution, and no right or wrong answer to valuing a business for this purpose. A business broker's approach may make sense from an accounting point of view or in valuing it on a market basis, but a business is usually worth more to an owner who is familiar with its operations than to a marketplace purchaser who will have to learn the ins and outs.

One fair approach which can be used if the parties are willing, is for you to stipulate a price per 1% interest and then let your partner buy it from you at that price (times your percentage) or sell their share to you at that percentage rate.

This approach is fair for you because you won't pay more for the business than you are prepared to, (and if you are being fair about your offer, you should also be happy to accept the same price for your share).

On the other hand, it fair for your partner because if the judge the price too low, they get to buy you out at that price (which should make them happy) and if they judge it high, they get to sell at that price) which should make them happy.

If you cannot reach an agreement as to how to resolve the matter, your options will be to force a sale or continue with a likely dysfunctional business, neither of which is advantageous to either of you. The process or the possibility of forcing a sale is quite different depending on the nature of your business - partnership, company, etc.

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Customer: replied 5 years ago.

As a partnership, my partner has said she will dissolve the partnership at the end of the month. She has said that a receiver will take over managing and selling the business. What are the implications of a receiver being appointed? What are the costs involved with this?

Am I able to buy the business once a receiver has been appointed? If someone offers $10000 and I able to offer $12000 and it be accepted?

Expert:  replied 5 years ago.

Distributing the assets of an unincorporated partnership is subject to:

And there is no set procedure for engaging a receiver, though this would appear a reasonable approach. The receiver can then arrange for the sale of the partnership assets individually or as a job lot, and there is nothing to stop you bidding on any proposed sale.

Indeed, the involvement of a receiver may be just what is required to get you and your partner to be realistic in your negotiations. The costs of a receiver will have to be borne by the partnership and can vary depending on who is appointed, and the complexity of the liquidation.

The only problem with this approach is that business may not be sold as a whole but rather the component assets may be sold separately if they are likely to bring a greater price if sold this way.

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Customer: replied 5 years ago.

Our partnership is 60:40 with me holding 40%. She has offered me to buy her share of the business for $45K. Our P&L shows a profit of first trading of $30000. I want to go to three cafe brokers to value the business and to place an ad for sale to obtain a realistic value. She has told me not to do this as it is a breach of the Partnership Act.

She has said that if I do not take her offer to buy of $45K by 31 Oct then she will place it in receivership. Can I offer for sale or is receivership the only option? Can they put it into receivership without me agreeing?

Expert:  replied 5 years ago.

In what way does she say you would be breaching the Partnership Act by doing what you propose?

The act doesn't specify that the appointment of a receiver is necessary, it just says that on dissolution of the partnership, the assets are applied to cover debts and then apportioned in accordance with the partner’s interest (i.e. 60/40).

You are partners and you need to work out how to proceed together, otherwise you will likely just end up in court.

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Customer: replied 5 years ago.
If the business goes into receivership what happens to the lease? Is the lease still valid?
Customer: replied 5 years ago.

If a creditor does not apply for receivership, can the owner apply for receivership for such a small amount of debt ($4K)? I have read that there needs to be special circumstances such as large debt? Also will the receiver require upfront payment as it may take time to find a buyer? With a 60% 40% partnership can the 60% partner have the rule on decisions?

Expert:  replied 5 years ago.

The lease is presumably in the business owner's name.

Only if you were operating your business under a company would you have the lease in the company name.

It follows that you and your partner will have to negotiate the end of the lease or otherwise agree for one of you to take the lease over.

The receiver will likely require upfront payment or at any rate will be able to claim against the partners for payment after the assets of the partnership are dissolved and distributed.

No doubt you should stay in touch with the receiver throughout and make it clear you are interested in bidding on any property which is being disposed of. The receiver's objective must be to maximize the return on any liquidation and so if you are prepared to pay a higher price than anyone else then you will be able to purchase the assets. Indeed, it may well be that the whole exercise becomes one of you, your partner and the receiver sitting down and negotiating the prices for all assets.

There are no rules that restrict what a receiver can do in this situation, since the receiver is simply an appointee of the partners.

You can object to any particular course as a minority partner, however, if either you or the other partner want the partnership to end, then you either have to reach agreement or liquidate the assets. As I've said though, if you can persuade the receiver that selling to you at any particular price will maximize the return then your partner will have legal issues if she doesn't sell on those terms.

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Customer: replied 5 years ago.

I am wondering what costs are involved with a receiver. My business partner has asked me to buy her 60% for $45K which is far more than the business is worth. She is in a great deal of debt and has taken a job hence why she wants to sell. She has said that if I do not agree to buy her out by 31 Oct then she will go to the court to dissolve the partnership to appoint a receiver.

Should I let her do this and wait for an offer? Then I offer a higher amount and then I can buy the business? As the net profit was $30000 with neither of us drawing a wage for the first year, I cannot see an offer above $25K being made.

The lease is both our names but the lease bond of $5600 is mine. Can I just take over the lease?

Expert:  replied 5 years ago.

I expect the lesser would probably agree to you taking over the lease, but would have to pay out her share of any bond or bank guarantee.

Also, I suggest you ask her what the difference is between having the property valued by a valuer (or three valuers) and her selling at that price and her having a court appointed receiver who simply value the business and then you will likely buy it off him at a value the valuer thinks is appropriate.

Not sure it should make much difference to you.

I think you should invite her to appoint a receiver on condition that the receiver advise you what he thinks can be raised and then agree to exceed that offer.

It seems likely that it won't be salable as a going concern so absent an offer from you, the business assets will simply be sold up in bits and pieces. In which case, you should be able to snap up either all the business equipment, or, the business as a whole for a bargain.

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Customer: replied 5 years ago.

My concern is what happens to the lease if it does go into receivership? Is the lease nullified and we (as in me) lose the lease bond?

Can you clarify the receivership process? Does the business keep trading as is and the receiver manages it? Or do we keep managing it as is until a buyer is found?
My partner and I currently work 60+ hours. Are we obligated to continue working these hours while it is in receivership? If so and my partner does not work her hours, can the receiver hire staff to work her hours?

Do the receiver fees come out of the final sale price in a 60/40 ratio as per the partnership? Or will the receiver require upfront payment?

My partner signed off on an air conditioner installation which is illegal. We now have to move it and submit a DA to Council. With the moving of the air conditioner and the DA can these costs be taken out of the sale price or will the sale be on an as is basis.
Should I notify the receiver and provide a written quote so that interested buyers are aware of these additional costs?

Expert:  replied 5 years ago.

The lease will be in you and your partner’s names and must be honored. That means that if you want to quit the lease you will have to abide by the lease terms for termination and may be liable for rent until such time as a new tenant can be found.

There is no formal receivership process for partnerships in the way that there is prescribed process for corporations (which is set out in the Corporations Act). Presumably, when you appoint the receiver you and/or your partner will be giving the receiver instructions to realize the maximum value from the business and/or its assets.

You should keep working in the business until such time as you and your partner decide not to sell it as a going concern; otherwise it will lose value as a going concern.

The removal of the Air Conditioner should eliminate the need to apply for a DA, however if you are going to keep it then yes these costs are partnership costs. How this affects your sale price is anyone's guess and is not a legal issue.

Leave issues as to what prospective buyers are told to the receiver. You can get in significant trouble if you are seen to be trying to reduce the interest of prospective buyers in order to secure the property for yourself at a bargain price. Your partner would then be in a position to sue you for damages.

I trust the above assists.

The receiver's first task will be to form a view as to the value of the business as either a going concern or alternately its recoverable value if its underlying assets are sold. If you make it clear you are prepared to pay the higher of those amounts plus $X then his recommendation ought to be that it be sold to you for that price.

You simply have to make sure you stay abreast of what is happening and how he is proposing to liquidate the assets. If instead of trying to maximize the assets the liquidator is being instructed by your partner to simply sell off the components without regard to maximizing the money raised, so as to thwart your efforts to buy the business, you should see a lawyer and takes steps to stop the receiver from doing so.

Yes, the receiver is paid out of the proceeds.

If you make it clear at the outset that you will pay $X more for the business than what the receiver believes he can recover any other way, the receiver should record

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