I have a colleague who currently operates his own business as a sole trader, future order book is looking very good and plenty of opportunities however as many are finding these days he is suffering a bit of a short term cash flow problem. He has asked if i would be prepared to invest X in the business for a share of Y and form a sole trader partnership, my question is - If i did can i do it on the basis that any debt that he is responsible for prior to my involvment he is liable for.
I know this is really a question for my solicitor but before running a bill up i thought if it was a simple yes or no somebody here may be able to offer advice "without prejudice"

Thanks

Would you be a director of the company or just a piggy bank?

Ady - i have not deceided yet, although my understanding of a sole trader partnership being a director would not be an option as it is partnership and the profits are shared as per the percentage of the partnership.

I think you would only be able to become a Director if you make the company a Ltd one. This would mean he ceases trading as a sole trader and becomes a Ltd company, you could inject money into the company by way of a directors loan.

As for any debt he currently has, im not sure but a decent accountant would be able to help you with that. 2017 Range Rover Sport Autobiography

Yes you can only become a director if he switches to limited........my suggestion would be to start a fresh as a limited company with both of you as directors, thus the debt stays with the sole trader, i.e. him, plug in your cash as a director's loan (from you)

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From bitter experience with a previous partner I wouldn't touch a deal with a very long bargepole unless you end up with a 50:50 share split as anything less giving him control is an absolute nightmare scenario. MY2011 HSE Santorini/Ivory/Piano Black/Privacy Glass/TV .Sadly gone.
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ChrisP wrote:

From bitter experience with a previous partner I wouldn't touch a deal with a very long bargepole unless you end up with a 50:50 share split as anything less giving him control is an absolute nightmare scenario.

Hi
Depending on the level of investment required you may want to have a full due diligence done to ensure you are buying in to what you think you are.
With regards to the debt, this will all be part of your negotiation to the percentage of the business you get for your investment.

If the business is worth £1m and you invest £50k, you aren't going to get the 50% others are suggesting.

If you are only investing a few grand, take the risk if you are happy with it. Whatever you do get a partnership agreement drawn up before you start, if saves a lot of falling out later.

Good Luck

stevecbj - With regards to due diligence I know exactly the state of the business as i have been working as a consultant within it on and off for the last 6 months, yes it has debts, not massive but still debts and your points are very valid.

The level of investment i had in mind is not as high as you quote but the opportunity based on my input and business brought to the table to date is very good with forecasted T/O in next 12 months approaching £500K with average 35 - 40% margin, my thoughts where to inject cash and balance of my fees for a larger share, i just need to decide how i mitigate some of the existing debt risk falling on my shoulders.

As said earlier if it was a Ltd company it would be a lot easier but at this moment in time and until we hit positive cash flow going Ltd would be a problem or hinderance IMHO.

Hi

My understanding is & sadly I'm not a lawyer, is that all partners are responsible for all the debt. Sorry I don't have a definitive answer - there must be a lawyer on here somewhere, who I've no doubt will put us all right.

Can the guy not pay off the debts, by a personal loan say? This starts everything off from a much cleaner base, otherwise part of your investment will surely just be paying debts off?

Cheers
Steve

stevecbj Thanks - some good points and a lot more thought for me to have and a trip to see my lawyer i think.

Effectively he is self employed as a sole trader, you go in on a sole trader partnership and you take on your % share of the accrued debts, for you to be safe he has to negate the current debts, with written proof approved by your legal chap, NO links must exist between his debt and the business, the trading account must not have a link to whatever methods he chooses to clear the debt, possibly the safest way is for your injection to equal the debt which starts everything from square 1, then on historical and projected work out your % of ownership, 50% is a good place to be, particularly if he isnt in a good place financially.

andy r wrote:

Effectively he is self employed as a sole trader, you go in on a sole trader partnership and you take on your % share of the accrued debts, for you to be safe he has to negate the current debts, with written proof approved by your legal chap, NO links must exist between his debt and the business, the trading account must not have a link to whatever methods he chooses to clear the debt, possibly the safest way is for your injection to equal the debt which starts everything from square 1, then on historical and projected work out your % of ownership, 50% is a good place to be, particularly if he isnt in a good place financially.

stevecbj wrote:

Hi
Depending on the level of investment required you may want to have a full due diligence done to ensure you are buying in to what you think you are.
With regards to the debt, this will all be part of your negotiation to the percentage of the business you get for your investment.

If the business is worth £1m and you invest £50k, you aren't going to get the 50% others are suggesting.

If you are only investing a few grand, take the risk if you are happy with it. Whatever you do get a partnership agreement drawn up before you start, if saves a lot of falling out later.

Good Luck