Purchasing a small business with payments from profits that involve multiple partners.

Trevijazz

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Feb 1, 2021
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My partner and I are purchasing %50 of a small business with payment installments from the company coffers to make the purchase. There are 3 partners total. With the 3rd partner owning the other 50% of the company. The total yearly purchase amount is $50,000. This amount will be paid for in equal weekly installments from the company account throughout the year. How will we reconcile the amount that the 3rd partner is owed at the end of the year as he is not on the hook for purchasing our percentage of the company but will be paying for it as a weekly expense. Our net profit should be around $450,000 total. Thanks a lot
Sincerely,
Mr. Good at building things bad at math
 

Jomo

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Dec 30, 2014
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I am confused. I have to ask if the 3rd partner is not on the hook for purchasing your percentage of the company but will be paying for it as a weekly expense, why is the 3rd partner willing to pay for it? I think that you did not mean to ask that.

For the record, this is a free math help forum where we help students solve their problems by guiding them to the correct solution and not just giving them the answer. We really prefer that you show us your attempt at this problem so you too can learn to think more mathematically.
 

lev888

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My partner and I are purchasing %50 of a small business with payment installments from the company coffers to make the purchase. There are 3 partners total. With the 3rd partner owning the other 50% of the company. The total yearly purchase amount is $50,000. This amount will be paid for in equal weekly installments from the company account throughout the year. How will we reconcile the amount that the 3rd partner is owed at the end of the year as he is not on the hook for purchasing our percentage of the company but will be paying for it as a weekly expense. Our net profit should be around $450,000 total. Thanks a lot
Sincerely,
Mr. Good at building things bad at math
The way I see it:
At the end of the year the original owner will have $50K.
If the total net profit for the year was N, then what's left after the weekly payments is N - 50K.
The original owner's share is 50% of the net: N/2.
Whatever is left is your and your partner's share: N/2 - 50K.

Disclaimer: not an accountant.
 

Jomo

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If lev888 is correct then the 3rd partner is not making the payments for you as I suspected. However, in my opinion you said he/she was.

Of course if you owe money to the original owner then that has nothing to do with the 3rd partner. Whatever the profits are for business,
50% goes to the 3rd partner and 50% is shared between you and your partner.

Think of it this way. Suppose you three start a business where you and your friend/partner put in $50,000 and the 3rd partner put in $50,000. Then you would share the profits 50-50. Should anything change with the 50-50 split because of where you and your partner got the money from? Maybe you had it in the bank, maybe you robbed the bank to get the money, maybe you borrowed the money from your brother, maybe you borrowed the money from a bank at a high interest rate or maybe you got a loan from the original owner. Do you think that the 3rd partner cares how you two got the money?

Let me ask you this. Suppose you and your partner had the $50,000 and the 3rd partner puts in $50,000. I would suspect that you would think that the 3rd partner would get 50% of the profits and you and your partner would get the other 50%. Now this 3rd partner comes up to you and your friend and says that he should get 60% of the profit because he took out a loan to invest the $50,000. Would you think this was fair?

For the record, this is not a math problem but rather a logic problem. The logic being whether or not a partner would care where you got the money from in determining the split.
 

Trevijazz

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Thank you for the replies and clarification on the intent of this forum. I had not seen anywhere in the about us statement that this space was dedicated to students. Thanks for your grace and understanding that people other than students may also have mathematical dilemmas ( or just logic problems) that they could use some help with.

Let me clarify: The payments to the former owner are being made from company funds, that are earnings of the company. Funds that the 3rd partner ( %50 owner ) is entitled to %50 profit from,
but is willing to wait until the end of the year when when we calculate all of our net profits, to reconcile that $50,000. ( maybe illogical, maybe there are just some nice people left in this world who are willing to help others succeed and provide a stepping stone to) I wonder how this will affect the total year end number. My likely flawed math looks like this. Projected Net profits are $450,000 %50 owner gets $225,000 the other two owners split $225,000.
Had the payment cost of $50,000 for purchasing the company payment not happened, the net profits would be : $500,000, %50 owner Gets $250,000 the other two owner split $250,000
That’s a $25,000 difference, but something tells me that we, (the other two owners) should owe the majority owner another $25,000.
Hope this helps my word problem make more sense. Thanks again for all the help.
 

lev888

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Jan 16, 2018
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2,166
Thank you for the replies and clarification on the intent of this forum. I had not seen anywhere in the about us statement that this space was dedicated to students. Thanks for your grace and understanding that people other than students may also have mathematical dilemmas ( or just logic problems) that they could use some help with.

Let me clarify: The payments to the former owner are being made from company funds, that are earnings of the company. Funds that the 3rd partner ( %50 owner ) is entitled to %50 profit from,
but is willing to wait until the end of the year when when we calculate all of our net profits, to reconcile that $50,000. ( maybe illogical, maybe there are just some nice people left in this world who are willing to help others succeed and provide a stepping stone to) I wonder how this will affect the total year end number. My likely flawed math looks like this. Projected Net profits are $450,000 %50 owner gets $225,000 the other two owners split $225,000.
Had the payment cost of $50,000 for purchasing the company payment not happened, the net profits would be : $500,000, %50 owner Gets $250,000 the other two owner split $250,000
That’s a $25,000 difference, but something tells me that we, (the other two owners) should owe the majority owner another $25,000.
Hope this helps my word problem make more sense. Thanks again for all the help.
Your intuition is correct: you are making a mistake. Reread my post. The 50% owner should get 50% of the actual net profit (before weekly payments deduction), plus 50k.
 

Trevijazz

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Feb 1, 2021
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I did read your post lev888 thank you. It seems to be accurate and the most logical the equation was also very helpful.
 

CaliA

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