Post #38,835
5/15/02 4:31:27 PM
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Opinion saught.
Recently I made a decision. I'm comfortable with it, although it has likely cost me one of my dearest friendships. I have a partner, he's a EE and I've been doing app development, he HMI (industrial app work). About last August, his side of the business really began to hurt. This year has been terrible, although he did recently get one job. I've been steady, but not making enough to really cover payroll for the 2 of us and all other related expenses. We have a line of credit (25,000) of which 14K we've already borrowed.
I looked ahead and didn't like what I perceived to be our future (namely, having to max out the credit line to cover expenses within 6-8 weeks). So, I told him I thought it was time to wind down. He doesn't think so, told me I "just don't get it. That's what credit lines are for: operating capital."
Me, I thought if you aren't making enough to cover expenses, and the future looks luke warm at best, you shut down while you can still walk away with some money.
Am I wrong? What do you guys/gals/others think?
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Post #38,839
5/15/02 4:55:24 PM
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Not that kind of credit
That's what credit lines are for: operating capital.
No that's what venture capital is for. Credit is a temporary measure to smooth out cash flow until the next payday. When you don't have a payday in the visible future, you shouldn't use credit. At least not your own. Thus, venture capital.
===
I can't be a Democrat because I like to spend the money I make.
I can't be a Republican because I like to spend the money I make on drugs and whores.
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Post #38,843
5/15/02 5:11:25 PM
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Call it quits
sell what you have and pay off the debt what you can. Or file for reorganization, chapter 11 or whatever number it is.
Show your partner the balance sheet and the income that you bring in and the income that he brings in.
Things are tought all over, I shut my business down way back in January 2001 and put it on hibernation. My partner started doing business by himself, being self employed.
Cut back on expenses what you can, until you can find a way to save the company.
I am free now, to choose my own destiny.
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Post #38,855
5/15/02 6:24:16 PM
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I have to agree with above posts.
The only time I feel comfortable hitting the credit line to cut paychecks is when we have more in A/R than we are borrowing. When we don't have more in A/R than we're borrowing and we don't have enough to cover all paychecks, the partners don't get paid that month. I'm probably a lot more conservative than most, but I have a simple rule when it comes to the credit line: hit it once and once only, pay it off before you hit it again (and the A/R rule still applies).
Maxing out your credit line when you're not generating enough revenue to cover expenses in order to stay open is like putting a brain dead patient on a ventilator. Can you extend life? Yes. Can you alter the outcome? No, you can only make the outcome more expensive.
Good luck,
Mikem
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Post #38,861
5/15/02 8:39:17 PM
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A lot depends on the agreements you and your partner had...
to begin with. Did you anticipate lean times or uneven revenue contributions from each of you and how you would handle it? Or, the conditions that would terminate the (presumably legal) partnership? If you had such contingency planning and agreement and you are acting on that then I see no problem with the path you have chosen. If, on the other hand, everything was informal and ill-defined, then problems are inevitable.
Certainly using credit to pay yourselves is folly, especially for a partnership.
Is it possible for you to put yourself in his shoes and understand his position?
Alex
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened." -- Winston Churchill (1874-1965)
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Post #38,865
5/15/02 9:48:09 PM
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I tried to anticipate, but failed.
When we first went into business together, I suggested forming 3 corporations. One that would be essentially his, one essentially mine, both according to the type of work done by each and one "parent" that had shares in both companies. I thought that would provide each of us with "a way out" if it ever became necessary to part ways, and would logically divide proceeds/debts. That idea was shot down by both our CPA and my partner.
To be fair, my partner has generated more revenue than I have overall. He was working for himself first and when I joined him, I didn't have much client base. So, the first 6 months he made quite a bit more than me. But starting in that 6th month (2 years ago) and continuing to today, I have consistently made more than he - and this YTD I've made 18K more, almost completely nullifying my shortfall in start-up. I've never failed to cover my paycheck and expenses, though, which is something he's failed to do for the past 6 months.
We do not have a formal buy/sell which is idiotic and probably will lead to problems. Today was a good day, but tomorrow may not be.
As far as "seeing things from his perspective" I've tried. I think the chief difference between us is that he sees debt as "something to be managed" and I see debt as "something bad that needs eliminated as soon as possible."
Thank you all for your input.
Regards,
Bill
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Post #38,867
5/15/02 10:05:38 PM
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What is credit for?
It is for having the money now to pursue opportunities that will make it back with interest. - Buying an education on credit is worthwhile because you make more money.
- Buying a couch on credit is stupid because there is no opportunity.
- Buying a car with credit could turn out either way. If you can keep a job as a result, it makes sense. If it merely makes you feel good, then it doesn't.
So ask him what the opportunity is. If he doesn't have a good answer, then cut your losses. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #38,871
5/15/02 11:36:11 PM
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Risk/Rewards
One thing you didn't mention was the possible rewards involved if the business were to become a success. You give us the risk ($25k in credit), but that is a minor amount for some types of business ventures - but it is obviously dependent on the nature of your business and the likelihood of success.
Personally, I'm fairly risk averse these days - having lost near $100k in a business venture 8 years back. I still do moonlighting for a startup, but I just don't feel like risking anything other than time these days.
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Post #38,888
5/16/02 10:00:39 AM
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Well as an informal model
Ask him to split the amount owed and see if the balance of the credit could be assigned to him personally. Then go separate. Hard thing to do,
thanx,
bill
TAM ARIS QUAM ARMIPOTENS
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Post #38,940
5/16/02 5:30:00 PM
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One more thing, AND IT IS VERY IMPORTANT!
Whatever you do MAKE DAMNED SURE your name is off the line of credit at the bank before you leave. You can have an "indemnity" clause in your stock sale agreement BUT THAT IS NULL AND VOID IF YOU LEAVE AND HE DECLARES BANKRUPTCY. The bank will come banging on your door if that happens, even with your stock purchase agreement indemnity clause.
You didn't mention whether you have an office lease or not, but if you do, also make damned sure your name is removed from the lease, for the same reason.
Now, if this is a 50-50 deal, the bank might not be willing to take your name off the line of credit without that debt being paid in full. If that happens, you have to either pay it off or trust that things go better in your absence. I would recommend, in strongest terms, that you make damned sure your name is not associated with any liability before you leave the company. I hate to sound so gloom and doom, but it's up to you to cover yourself. If there is any hostility between you two now, things could get ugly. But if you don't severe your relationship with the business now, things could get a whole lot uglier later.
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