Suing for monetary value of a business (long)

Factual Questions
1

Here’s some quick history.

I started a computer business with someone 7 years ago. It was a partnership with myself and one other person. The company grew pretty well and everything was going great.

About 4 years ago we started an ISP. This was a corporation. This company grew as well and everything was going great. Both companies worked out of the same shop.

Around the same time we started the ISP my partner and I brought in another person, but not as an employee but as his own company. He did computer repair and we rented him space in the retail/workroom area. His take home pay was whatever he could make fixing/selling computers. He was also the third shareholder in the ISP corporation.

At the start of 2002 we all sat down and talked about having the ISP buy the computer business. We had talked about incorporating the computer store but thought it just might be easier to have the already established corporation buy the computer store outright. This way everything was together, all under one name, which would make some things easier.

Because we had talked about the ISP buying the computer store, my partner and I worked out the value of the assets only (retail items, slatwall, workbenches, tools, etc). Then the ISP would just start offering computer repair and sales after it bought the assets to do so. Needless to say the assets didn’t add up to much (also, everything wasn’t included because my partner kept saying “think of this as a bonus. We don’t want to put a huge money strain on the ISP”). We came up with paperwork to “dissolve” the computer store. The assets from the store would be sold and the money split evenly between myself and the other partner. We both signed it.

About a week after I signed the paperwork I learn the other two guys had been doing some talking on their own. The new plan was to have the ISP buy all the items but each of us would start our own NEW computer business and just work out of the shop. This didn’t make any sense to me. Their way of thinking seemed counter productive to the first idea of bringing everything together. I was, how can I say, pretty pissed. They wouldn’t listen to me at all. I have a feeling they were thinking of doing this in the first place and I was lied to. Of course, I can’t prove that.

I took a couple days off to think about the situation and during this time I was sent a letter from the ISP. The two guys decided to change the locks, change the alarm codes and put me on a “leave of absence”. WHAT?? I was pissed. I decided to head down to the shop and remind them the ISP’s name isn’t on the lease. The lease was under the 3 of our names but under the business name of the computer store I and my partner owned. I tried to get a locksmith over to key me a new key but during this time one of the partners called the police to have me removed for trespassing. Of course the cop saw I was on the lease and just asked us all to leave and settle this matter in court. I picked up my personal effects (personal laptop, workstation, etc) and left.

Then I got a couple more letters from my partner. One $300 payment. Then another $300. Then a $50 payment for the assets and a letter that says around $3000 of the assets money had been paid already. His reasoning was my personal effects I removed made up for the extra payments for which he included the words “no proof of ownership provided” implying the company owned these things. I thought this was bunk so I took this straight to small claims. I’ve not been though court yet.

The business had two names. We started the company as one name and then picked another name to use as a DBA after we moved into a better retail spot several years back. The DBA name just sounded better. It was listed with the state of Oregon as a DBA of the first name. It was NOT it’s own company.

The two partners continue to do business under the DBA name even though according to our paperwork this company was supposed to have been dissolved. In fact I just saw a new business card from there and it’s my/our DBA name. The ISP isn’t buying the company assets. The few checks I’ve gotten were from my old partners accounts which he also has listed as a business account (on the check it says his name DBA business name). The business name he’s using is a slight variation from our DBA name. I figured he did this so he could cash checks that came in under the DBA name. The names are THAT close.

So here I am locked out of my business and tricked into giving up my portion of the business for the low price of just half the value of the assets. If I had sold this business of course the value would have been much more.

So, before I hook up with a lawyer about this, what do you suppose my chances are of suing for the business itself? It’s pretty obvious no person in their right mind would intend to sell their half of a a successful computer store for only $3700 bucks (the value of my half of our assets). My ownership of the company would be much more then that.

It’s hard for me to place a good number on the worth of the company because the partner won’t give me any paperwork and he WILL NOT file our 2001 taxes even though I asked him several times to do it. I don’t have any of the accounting from 2001 except a general number of our earnings with was about $60,000+ profit for the last 3 years -which was split between the two of us. (I wasn’t getting rich from the store, but I earned a nice living. Plus, I was doing what I loved)

Needless to say I think I’ve just lost out on the ISP corporation because the company votes on everything and it will always be 2 against 1. Even though I put together that entire company and everything that company offers to date is because me. I can’t even sell my shares out because the bylaws say the ISP gets first dibs on them, if they don’t buy them I can sell to another person, but this has to be approved by the ISP because the stocks are not public. Of course, the ISP would NEVER approve the sale. I think I’m screwed on that business.

Is there a good case here?
Anyone have ideas on this?

I do plan on contacting a lawyer but I’d like to have a few ducks in a row before I do. I could just go to small claims and sue for the top small claims amount of $5000 (which is selling myself short) or take the other route of a larger lawsuit -which I honestly don’t know much about doing.

Help!

2

It’s time for you to talk to an attorney IRL.

Good luck!

3

Valuing a business is often as much art as science with a liberal helping of common sense. The primary basis for valuation, however, is normally (not always) a multiple of the net, after tax income stream.

see Valuing a Business for various valuation methodologies.

As to the question of whether you were screwed, or you screwed yourself, I have no idea, but based on your descriptions of the wheeling and dealing it sounds like you did all this sans a lawyer’s review. You need to talk with a lawyer, but do so from a common sense business perspective and not a position of seeking revenge. The company’s total asset base and income potential you have described is not that great and little PC store ISPs are a dime a dozen. Your strategy should be to squeeze the maximum “go away” payment out of them as quickly as possible.

Forget about small claims court for the time being. You scenario is a bit complex for that. You need to contact a lawyer that specializes in commercial law cases. You will probably have to pay a legal retainer plus a fee for an accountant to review and (maximally) value the potential business interest you have been snookered out of. This is likely to be a few thousand dollars unless the lawyer is a pal. The real problem in your scenario is the cost of pursuing potentially complex litigation with a very small pot of gold at the end of the rainbow.

Without having the business professionally valued, the best (and cheapest) interim solution might simply be to have the lawyer write a fearsome and threatening letter with some dollar amount attached, and specifying that this “deal” will become much more expensive to them if you have to initiate full court press litigation.

4

astro: I did do it all without talking to a lawyer for the simple reason -I trusted my partners. That will learn me.

I’m also not too concerned with the overall payout. Sure, I’d like to get the full amount but I know that won’t happen. If I do nothing then I get nothing. If I sue them for, say, $10k and I get $2k with 8 going to the lawyer, then I’ve got 2k I wouldn’t have had. Plus, the partners have to pay what is owed and not just get it for free.

5

As you probably realize at some level, there is a difference between buying the physical assets of a business, and buying the goodwill and the value of the business as an ongoing business. From your description, it’s not clear to me what you had intended to do, and what actually happened.

In any event, most U.S. states have statutes to protect minority shareholders from oppression. What you have described sounds like a classic case of oppression, although more facts are necessary to make that determination. Your remedies will depend on the statute in question, but might include forcing your partners to account for the corporation’s profits and buy you out.

Further, most U.S. states have a procedure whereby a partner can have a partnership dissolved and the assets distributed to the partners. You need to investigate that procedure.

Two pieces of free advice:

  1. Document everything!! Keep notes of every phone call; save every piece of paper; get the police report for the “lock-out” incident, etc. When you get to court, your partners will probably deny having locked you out of the business if you can’t prove it.

  2. See a lawyer. (I guess you knew this already.) Many lawyers, (including myself) will give you a free initial consultation. If you are in New York, USA or New Jersey, USA, feel free to drop me an email.

Standard disclaimer: I’m not your lawyer, etc.