Why you shouldn’t sell minority ownership of your shop

If an employee in your shop shows sudden interest in being a minority owner, you should be cautious, advised an accountant who specializes in the automotive aftermarket.

Typically, they see the profitability of the business and want a piece of the action, explained Hunt Demarest, accountant and business valuator with accounting firm Paar Melis.

“I hate, hate, hate, hate, hate selling minority shares in businesses in an official manner,” he said during the session Transitioning Your Business at the Midwest Auto Care Alliance’s Vision Hi-Tech Training & Expo in Kansas City.

The potential minority owner is there for the good times. Are they prepared for the bad times as well?

“What is the person really saying when they want 20 per cent of your business? Profit — they want 20 per cent of your profit,” Demarest explained. “They don’t want to be on the hook for 20 per cent of the liabilities. They don’t want to put in 20 per cent when money is tight and need to inject money back into business.”

If they’re not prepared to pony up when necessary, don’t open the door to the possibility. Instead, offer them a comp plan if they just want to reap the benefits and upside. You can work out an arrangement and pay them 20 per cent of the profits. They don’t own that percentage of the business but they’re getting something out of it by being incentivized.

Besides, Demarest noted, having a partner can be difficult. Say you were running your kids’ education or a hobby like racing cars through the business, your new partner may not be all that thrilled.

“Johnny owns 20 per cent of my business — he’s not gonna be super happy about the $60,000 I just spent on all the parts of my dragster,” Demarest painted as a scenario.

So adding another cook in the kitchen can be troublesome — especially if that minority owner is also an employee. That’s two different relationships with the same person.

Say their performance slips at work or they’re showing up to work drunk. You can fire them as an employee. But they’re still your business partner.

“I don’t care what that paperwork says, I don’t care what clause that you have in it, if he wants to make my life hard, that 20 per cent of the business that he has, is very, very hard to get back without spending a bunch of money on lawyers,” Demarest explained.