“But what about the debt?”

Step 1 Valuation Benchmark:

Pain point: Unfortunately, some business relationships don’t last long. People have good intentions. They are nice and friendly when they go into business together. Everyone plans on success.  No one plans on things not working out as planned. I helped two people enter into a partnership. A couple years later, the partners want to split. The problem or pain point during the split was: How much compensation should be paid? Who should pay what to whom, and why?

Some debt had accumulated.  “Charlie” wanted out of the business, leaving “David” with the responsibility of paying back the debt. In a small business like this, losing one partner is like losing half of the revenue stream, thus making it difficult for one partner to survive.

Four of us met:  Charlie, his representative (my counterpart), David and me. The discussion went something like this:

Charlie’s representative “Andy” was loud and demonstrative. “My client sold more than your client did. So, his accounts receivable is more than enough to cover his half of the debt. We don’t owe you anything and we want to walk away free and clear!”

Solution:

Whenever someone gets loud, I tend to speak more softly and quietly, trying to deescalate the situation. Emotion, while present, may be a hinderance to getting a settlement.

My reply was simple and straight forward, “Respectfully, there are two facts involved that we should all consider:

  1. “Your client owns no Accounts Receivable.” All his sales activities were done on behalf of the company. The company already owns all of the A/R, so you are not “offering” or “giving” us anything.”
  2. “Your client and mine signed several debt obligations with joint and several liability.” So regardless of what we think, feel, or agree to here, the lender can seek payment of 100% of the debt from your client at their sole discretion.”

I summarized our position as follows: “However, if your client pays us half of the outstanding debt, we will indemnify him against any possible future claims.”

Results: The meeting ended right there. There was no further argument on their behalf. My client got the settlement we were seeking.

Takeaway: Shareholder disputes may easily carry some amount of emotion with it. It is helpful to have someone in your corner that is detached from the emotion and can help the client navigate through those turbulent waters. As Joe Friday used to say on Dragnet, “Just the facts ma’am.” Obviously, sometimes facts are a bit cloudy and depend on one’s point of view. However, in this case the facts were clear, at least clear enough to get the settlement.

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