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.
Rip West
Ridgway, CO