Splitting up: the things that are not in the books are what people actually fight about

Hook

Ten-odd years in business, and the ugliest scene I have seen is not a collapse, it is a split. A collapse is everybody losing together, and there is at least some fellow feeling in it. A split is two people sitting down, each producing a set of books, and then finding — they are not the same set at all. And what they actually fight about is almost never those numbers written in the books. It is the ones that are not.

The first battlefield: whose thing is this actually?

Partnership law defines partnership property. The gist is: property brought into the partnership, or acquired for the purposes of the partnership and in the course of the partnership business, must be held and used only for the purposes of the partnership. It sounds clear enough. In practice this is the hardest thing to divide. Here is one we really do run into often: a used-car dealer. Those cars parked in the showroom — are they the company's "stock", or his personal cars? Do not go by feel. Ask four questions. One, the money that bought that car, which account did it come out of? The company's, or his own? Two, whose name is registered as the owner? Three, was it recorded as stock in the books? Four, after it was sold, whose pocket did the money go into? If the four answers point at the same person, there is no argument. If the four answers fight each other, that car is a lawsuit. And the most awkward combination is: the company's money paid for it, it is registered in his name, it was never recorded in the books, and the sale proceeds went into his personal account. That is not rare. That is very common.

The same four questions, applied to your own business

These four questions are not only for car dealers. The machine in the shop, the lorry registered in a personal name, rent collected into a personal account, stock kept at the boss's house — run all of them through the same four questions. And you do not have to wait for a split. You can run them tonight. If you find three or four things you cannot answer, that is not a "deal with it later". That is documentation you should be putting right now.

The second battlefield: who does the customer list belong to?

The second most-fought-over thing is the customer list. The customer list, the supplier relationships, the reputation of the business — together these are called goodwill. It usually belongs to the partnership property. But it has one characteristic: it has no document, no invoice and no market price. So at a split, both sides say the same sentence: "those customers follow me." And both sides may be right. Which is why it cannot be argued to a conclusion. In practice the customer list is usually handled in one of three ways. First: whoever takes them compensates the other. You want to take that set of customers, you pay the other side a sum. Second: no competing and no poaching for a period. But this only means anything if it is written into the agreement — saying it out loud is worthless. Third: a share of the revenue those customers actually generate, paid out over time. As much as it makes is as much as gets shared, which is the fairest, but somebody has to be willing to keep reconciling. Which one you choose actually turns on one question: does your business run on people, or on the shop? A business that runs on people (consulting, design, sales) — the customers follow the person, so it should be the first or the third. A business that runs on the shop (retail, food and beverage) — the customers follow the location, so the customer list was never worth that much in the first place.

The third battlefield: settling without cash

Bosses often ask: "what if I do not take cash?" Four common ways, each with its own thing to guard against. One, take assets in kind — take the car, the machine, the stock in settlement. The problem is what price you record it at: net book value, or market value? Both sides using different bases, and that difference is the argument itself. Two, take property. That brings in real property gains tax and stamp duty, and the transfer takes time. Work it out first, then negotiate. Three, the business carries on and pays the leaving side in instalments. It sounds like the friendliest and carries the biggest risk — what if the business does not do well afterwards and he cannot pay? So there has to be security or a charge, not just "I will pay you back". Four, one side takes over everything, and takes over all the debts too. This is the one most people misunderstand: until the creditor agrees, the one leaving is still liable. The agreement between the two of you does not bind the creditor.

The real reason: the books never reflected the real business

Now the thing this episode is really about. In a lot of businesses, the numbers in the books were never the whole of it. The most typical example: scrap. A factory's scrap steel, offcuts, old cardboard — sold, cash taken, never recorded. In the same category: cash sales with no invoice, payments collected into a personal account, special prices for regulars with no record, stock the boss took himself with no adjustment. Ordinarily nobody has a problem with any of it. On the day of the split, the problem arrives. One side will say: "hang on, all these years there was also the scrap money, that has to be counted too." And then it jams. What I am talking about is not morality. I am talking about a very practical consequence, and here is why: you cannot take a set of books you yourself admit is false and use it to claim a share. The moment you open your mouth and say "actually there was also the scrap money", you are admitting two things at once — that this business's books are incomplete, and that you were part of it. So what does that money turn into? Whoever got it, it is theirs. And usually that is whoever holds the keys. This is why splits turn nasty. Not because there is not enough to divide. Because one side discovers that their half was never recorded in the first place.

So what do you do

There are only two roads. I will only talk about these two. Looking forward — from today, record every single transaction. Including the scrap, including the cash, including the price for regulars, including what the boss takes himself. This is not for the tax. It is so that on the day it has to be divided, you have evidence in your hand. A transaction recorded is a transaction that is yours. Not recorded, it is only money that happened to be in your pocket at the time. Looking back — if there are things not declared in the past, the only way to handle it is to go to your tax agent and use the formal declaration route. There is no third road. I know somebody is hoping I will talk about a third road. There is not one. Anything that sounds clever ends up with two people sitting on the other side of the same table together.

To close

On splitting up, one honest line: the splits that can be settled are almost all the ones that were written down clearly at the start. The ones that cannot be settled are almost all the ones where people thought "we are such good friends, what is there to write down". A partnership agreement is not distrusting the other person. It is the two of you, while you are still friends, deciding together what happens when you are not friends any more. Want to get this written down clearly now — or already splitting and wanting to sort it out? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.