Yeah, But How About Non-Refundable Fees
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Yeah, But How About Non-Refundable Fees No sooner is the cyber space ink dry on my final,
definitive treatise on fees than a reader chimes in,
Yeah, but how about non-refundable fees. Our
agreement calls for a $100 non-refundable fee to be paid by all members when
they come into the club. How does that fit into your scheme of
things?
Short answer: it doesn't [fit]. Long answer to
follow.
Many agreements seem to call for
non-refundable fees, but none of them tell you how to
compute them. The usual practice is for a club to pick some number for such
non-refundable fees, presumably to cover administrative expenses. Let's try to
boil this down to very simple cases that we can follow easily.
Assume a two man partnership of Able and Baker. Able
makes an initial payment of $900 and receives 90 units. Baker puts in $100 and
receives 10 units. Now they decide that each should contribute $50 to cover
expenses. At this point, before any expenses are paid, the club has $1,100 in
assets and 100 units outstanding, making each unit worth $11. Baker is worth
$110 [10 times $11].
If Baker gets out at this point, he should be paid $110
less any withdrawal fee. But, wait a minute! There's this $50 non-refundable fee
to consider. All right let's deduct $50 from his value and pay him $60. So
without the club suffering any loss at all, Baker pays in $150 and receives $60,
thus losing $90. Now there's a real non-refundable fee.
Ok. I admit that's an extreme case and Baker is suffering
because Able gets most of his fee.. Let's take a situation where the positions
are relatively equal.Suppose Able and Baker both start off with $500 each, and
receive 50 units. Then they each put in a $50 fee for expenses. Let's say they
spend $25 on postage. Now Baker wants out. The total assets of the club are
$1,075 [that's $500 + $500+ $50 + $50 - $25.Baker is worth half of that, or
$537.50. But we can't pay him that because we have this non-refundable fee to
contend with. Do we deduct $50 from his pay out figure? But of that $50 fee,
$12.50 has already been expended and deducted from his total value. So, it would
seem the fair thing to do would be to charge him only $37.50 of that
non-refundable fee.
Are we beginning to see the problem here? Consider what
happens a few years down the road, when we have admitted several new partners
and have expended unknown percentages of their non-refundable fees. There is no
practical way to compute the unexpended portion.
So my answer to 'Where do
non-refundable fees fit in?' is 'They
don't'.
I recommend strongly that the term non-refundable fee be
stricken from all partnership agreements.
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