Include exit strategy in partnership ventures

Dear R.E.: The problem here is that a partnership agreement should have been entered into prior to the partners getting involved with one another. The question of how to buy partners out should have been established in advance. That said, at this point, it would seem that the person who wants out should be advised she’ll have to wait for her money. It’s unlikely the business can afford to buy her out for cash. Hopefully, the partners can sit down and work out an amicable arrangement. The party wanting out is going to be unhappy not getting her investment, possibly with a profit, back immediately. I don’t see where any profits are deserved at this moment, and it is unreasonable to expect the business to cough up a large sum of cash so she can walk away with her investment.

Time to hold or fold?

Dear Bruce: We owe $75,000 on a home line of credit interest-only loan. This money was used to open and support a small retail business we own. The business earns a small profit, but not enough to make much headway on paying back this debt. We pay several thousands against it over a few months and then find we are in a cash-flow bind and have to pull money out again. We are tired of chasing our tails on this and think this debt could be eliminated. The loan is due in June 2008. I have $65,000 in a personal individual retirement account that was a rollover from a profit-sharing plan at a former employer.

What do you think about converting our current S-corporation into a C-corporation and rolling the $65,000 into our own company-sponsored retirement program? These funds would then be available for our corporation to use to pay off the line of credit. On paper, the retirement funds would still be there for me in the new plan. At some point, maybe in two to three years, we plan to sell the business. At that time, profit from the sale could be dumped back into the corporate retirement plan to reflect a good interest-rate return on the plan in the interim period. In effect, I would not be losing any growth on the money but could get out of debt. There is risk, but there is also a certain risk in leaving my money in the current IRA mutual funds. What are your thoughts on this idea? – Gary, Kalamazoo, Mich.

Dear Gary: This is a very convoluted plan that may make sense, but it is obscuring the reality that your small business is not earning enough to retire its obligations. Given that set of circumstances, what makes you believe that in a year or two or three, there will be a profit or even the ability to sell the business? You say you’re chasing your tail, and that could be the case, but the real reason is that this business is not worth pursuing. Having made that decision myself, I know how hard it is to swallow – whether to hold or fold. Converting into a C-corporation and rolling the money over sounds attractive, but the reality is, you have to increase your income and that means concentrating entirely on the business and, if that is not possible, biting the bullet.

Entrepreneurship requires sacrifices

Dear Bruce: Through the years, you have mentioned there are businesses that can be run semi-absentee. Can you give us some idea as to the type of enterprises? We have been looking for a legitimate business for some time, either home-based or otherwise. – B.N., via e-mail.

Dear B.N.: Home-based businesses, while potentially profitable, are far more difficult to find than more traditional enterprises. The difficulty with absentee or semi-absentee operations is you must really understand the business. The owner who doesn’t know the business intimately can easily be skimmed, and he’ll never know it’s being done. Enterprises that handle cash are the main target, but they are not the only ones subject to abuses of this kind.

Before you venture into an enterprise, you would be well served by finding a job on a part-time basis in whatever field in which you’re considering finding a business to own. You will learn from the inside how the business should be run. The hard fact is, not everyone is meant to be entrepreneurial. There are a great many sacrifices in terms of time and investment. In the small enterprise, which is what most of us would be able to swing, the boss is the guy who has to be there when others fail to show up. Whether you are running this on an absentee basis or not, if the door has to be kept open and a service performed, and your employee calls in sick, guess who will be working? I would consider this before I jumped.

You also used the word legitimate. When you see opportunities advertised for making a ton of money at home, run the other way.

Retirement funds should be safe

Dear Bruce: My company recently filed Chapter 11, and now it is going out of business. The bankruptcy court says it will hold my 401(k) equity for six to nine months. Is there any way I can prevent this? – N.P., via e-mail

Dear N.P.: If administrators in the bankruptcy are holding the money, there is very little you can do to expedite the release. However, you should feel content the money is safe and will eventually be turned over to you to roll over into another savings vehicle.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.