How do capital accounts affect a partnership buyout?
Hi everyone. Can you help... small biz owner here...
Is any amount remaining in a partner's capital account, a legal sum of actual money owed to that person when they retire or sell their equity in a business?
My business partner is getting out and leaving the company. He originally invested $20K into the business and made his money back plus a lot more on top - which has been paid out to him over the years in partner distributions. However, there is still $20,000 on the books as a record in his capital account. Is this $20K real money? I mean - is this an actual sum of cash owed to a partner when they leave or sell their equity in the business?
So if I want to offer him $20K for his share of the business. Supposing he accepts... do I owe him $20K of my own money AND everything in his capital account (total of $40K)?
And how does it work if I offer him $10K for his share of the business or 15K, or even 50K? I'm trying to understand how that $20K in his capital account affects my offer in terms of the actual final check I write?
I don't want to make my offer then find out the company owes an additional $20K on top (I think I'm treating a capital account like a savings account, which I feel is wrong).
Your help and understanding of this capital account quandary would be appreciated. Thanks -M
Capital account investment by a partner appreciates as the value of the business grows and goodwill and market standing makes its case. No way can you settle your partner at $20,000 dollars initial investment. If that is the case, I will give you the example of a partner who invested $75,000 dollars in a business and was not even paid that $75,000 when he or she retired. Fleecing a business partner is easy. But buying them out is an understatement.