another owner exits

By Posted in - Uncategorized on April 13th, 2015 0 Comments

Open Produce was started way back in 2008 by three people — Andrew, Steven, and Gabi. Towards
the very, very beginning, Gabi bowed out (you can read her reasons why here) and for the first
two years or so, Andrew and Steven worked side by side growing the business.

At some point in 2010, Andrew left the day-to-day operations but remained involved as an owner,
in a more board-like capacity. He was weighed in on big decisions and helped tackle big
problems and was part of large steering conversions. I (Steven) continued to run the day-to-day
and pulled a (modest) salary; Andrew was working only for the promise of his share of future

That arrangement worked well for a number of years, but as 2014 drew to a close we both felt it
might be time to renegotiate. Andrew had moved to California and was focusing on other
projects, while I felt any new direction the store took — for better or worse — would be on my
shoulders, and I should take a larger share of risk and reward. Additionally, we’ve been
positioning to apply for a license to sell beer and wine, and changing ownership before that
process is way easier than after, so we had some incentive to move sooner rather than later

So the question was how to reward Andrew for his initial ideas, two years of full-time work, and
several years of board-level stewardship, without bankrupting me. We came to this arrangement:

– I would pay Andrew $71,000 for his half of the business.

– We would subtract from that some money Andrew owed the business from some financial hijinks in

– I would pay the remainder in the form of a promissory note (a loan), payable over 20 years, at
4% interest. I can pre-pay at any time, and can skip two years of payments without penalty, to
provide me with a little flexibility.

– As part of the deal, I also agreed to have Open Produce repay the original $35,000 loan from his
father within the next 7 years, which is something we had been hoping to do anyhow (the original
loan agreement requires us to pay him back by the end of 2009, but he has graciously allowed us
to delay without penalty other than the normal interest).

That might seem like a lot of money, and it is — but spread over 20 years it comes to a more
manageable figure of just over $3,000 per year. Essentially, instead of Andrew getting half of
future profits forever, I am promising Andrew the first $3,000 of yearly profits from the
business until 2034, no matter how much the business makes, even if it makes no money at all.

Is this a good deal? It depends on how the business does. If it goes out of business next
year, it’s a horrible deal for me. If it starts profiting $50k/year and stays that way for many
years, then it’s a very good deal for me. But overall we both feel it’s a fair deal, insulating
Andrew for future risk but also removing him future profit. Plus I’m free to take the business
in new direction without his agreement, and he’s free to remove the burdens of business
ownership from his mental load. Only time will tell who got the better deal financially, but
we’re both happy with the sale right now.

Of course, the same compatibility that allowed us to be good business partners helped with this
whole process immensely. We were on the same page, shared the same values, and had good
communication. And while we both wanted to get a good deal for ourselves, we weren’t out to
screw the other person. After we came to an initial agreement, though, we decided this was
enough money it was worth getting some lawyers to haggle over the wording, and then we finalized
the deal, effective December 1st, 2014, making me the sole owner.

And then I set up an automatic recurring monthly payment for the next 239 months. December
2034, here we come!

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