Obstinate Partner

Dear Dave
We have maintained a $100,000 line of credit (LOC) since we started our firm. A few years ago, I recommended that we raise our LOC (to $250,000 or $300,000) as an amount that better reflected our size (at that time our annual billings were $2M to $2.5M). Even though we have never had to use it, I feel better knowing we have it in place for an unexpected emergency.

One of my two other partners did not want to increase the LOC. The bank offered to split the personal guarantee into three equal $100k portions for each partner (which basically did not increase our individual personal guarantee amount). After months of painful discussions we renewed the LOC at the $100k limit.

Last November, our LOC was once again up for renewal and the topic of raising the LOC limit came up. The reluctant partner proposed that we all sign an amended shareholder agreement with several stipulations that clearly showed a lack of trust in other partners as a pre-condition to his signing the new, increased LOC. Needless to say we did not agree to sign this amended agreement and after months of putting our banker off (to the point where it is embarrassing) the same partner has now stated that he is not going to sign any LOC. We’re stuck.

I feel that not maintaining a standby LOC is not in the best interest of the firm. Our options as I see them are to have two of the three partners sign the LOC and make adjustments to the role/authority/participation in the profit sharing of the non-signing partner, or remove the partner not willing to sign LOC.
GH OR

Dear GH
I agree with you. Operating a firm without adequate provisions for back-up capital is like a cruise ship leaving port without lifeboats. Assuming your bank would even go along with two out of three partners signing personal guarantees, it is not a good idea to allow the third partner to remain in ownership without equal participation in the risk. I suggest the two willing partners offer to buy-out the interest of the third and extend to the ex-partner a pay and benefit package reflective of the value he brings to the practice. If the partner refuses, then the two of you offer to sell the firm to the third.

Situations such as this, by the way, are exactly why key documents such as a thoughtfully prepared set of corporate by-laws and buy-sell agreements between owners are so important. The path to impasse resolution (legally at least) should be clearly spelled out in your governing documents.