Business question: When you buy into a business and become a partner, are you also buying the previous expenses/losses of the sole owner?
I have a friend who is in negotiations to buy in to a business which is now owned by a single owner. The owner quoted a price of $250k for a total buyout and $100k to become a 49% partner (the owner is insisting on this detail to have final veto power in the business). The business is currently in the red and has quite a way to go before being profitable. The owner has been paying out of pocket for these losses and even took out a loan for $125k to cover these expenses. In order to be profitable, some renovations and other expenditures need to be made so the business can accommodate more customers (and hence, more income).
While negotiating the terms of the partnership, certain questions have come up that I find baffling:
1. The owner insists on a 51% share of the ownership, but will split the profits 50–50. Is this common in partnerships?
2. After my friend expressed interested and agreed to paying 100k for a partnership agreement, both sides agreed that some additions need to be made to the business. The owner expects my friend to pay half of the costs for these additions, on top of the $100k already paid. It seems to me that my friend is buying an incomplete business and that any additional costs should be taken from the $100k, not in addition to it.
3. The owner also expects my friend to pay half of whatever remains of the $125k loan (some portion of the $100k my friend is paying for the partnership will go to pay this; what remains of the debt will be split by the two partners). My friend balked at this, thinking he was buying in to the business, not the owner’s previous expenses. The owner’s perspective is that she spent/lost money on the business already, so that’s part of the cost of buying in.
The third point is the one that strikes me as the strangest one. When you buy into a business, does that mean you are buying into all of its losses retroactively? Why is my friend responsible for lost money or loans spent by the previous owner?
I’m not having an easy time wrapping my head around something like this, so I’d like to get some perspective and fresh looks at the situation. When you pay someone to become a partner, what exactly are you buying? Should that money cover any subsequent expenses needed in the business, or are those costs shared? Should that money cover previous losses before the new partner came on?
wow, this seems more complicated now that I’ve written it out
This question is in the General Section. Responses must be helpful and on-topic.