Two Loans, Two Owners, One Franchise That Almost Split Unevenly

The situation

Samson worked front desk at a hotel for years before he and Genevieve bought into a small franchise together, a quick-service food outlet that ran on tight margins and long hours. The plan, when they started it, was ordinary. Each of them would keep their day jobs at first, Samson at the hotel and Genevieve as a veterinary technician, and lend money to the new company whenever it needed cash to get through a slow month or cover an equipment repair. Neither of them drew a salary from the business in its early years, and both treated the franchise as something they were building on the side, in the hope that it would eventually replace their day jobs. The loans were meant to be temporary, the kind of thing two friends do for a company they both believe in, with the understanding that the business would pay them back once it was steady enough to do so.

It never quite got steady enough to pay anyone back. Every time the franchise built up a small cushion, something ate into it: a walk-in cooler that failed in summer, a slower season than expected, a repair the franchisor required on short notice and would not extend the timeline on. Samson and Genevieve kept lending small amounts as needed rather than letting the business go under, and neither of them tracked it with much discipline. There was a spreadsheet, updated inconsistently by whichever of them happened to remember, and a shared, informal understanding that they were each putting money in and would sort it out properly once the business had breathing room. Luc, the accountant who prepared their year-end filings, mentioned more than once that the loans should be tracked more carefully while they were being made rather than reconstructed later, but the advice never quite turned into a habit either owner kept up.

By the time they decided it was time to sort it out, several years had passed and the franchise had finally started producing a modest, dependable profit. The idea that made sense to both of them was to convert what the company owed each of them into company shares, cleaning up the balance sheet and formalizing what had, until then, been an informal habit of one or the other covering a shortfall out of pocket. It felt like the responsible next step, the kind of thing a growing small business is supposed to do once the founders are ready to stop treating it like a side project funded out of their own savings.

They had actually started the process with another lawyer before that lawyer left private practice partway through the file, without much warning to either of them. The conversion was partly documented but not finished, and Samson and Genevieve, wanting to close it out and move on, brought the unfinished file to our office assuming it mostly just needed a final review and signing.

The legal problem

The first thing we do with any inherited file is rebuild the picture from the source records rather than relying on the prior lawyer's notes as accurate, since a partly finished file can carry assumptions forward that were never fully checked by anyone. When we reconstructed the actual loan history from the company's bank records and Samson and Genevieve's own personal records, the numbers told a meaningfully different story than the shared spreadsheet suggested. Samson's total loans to the company, made steadily over several years in smaller, regular amounts, added up to noticeably more than Genevieve's. Genevieve had lent money too, and her contributions were real and important to keeping the business afloat, but they came in smaller amounts and with longer gaps between them, partly because her own income had been less predictable during those years.

The draft conversion plan the previous lawyer had started treated the two loan balances as if they were roughly equal, converting each into the same number of new shares regardless of the actual amounts owed. That was not because anyone had sat down and decided it should work that way. It looked, from the file, like an assumption made early in the process and never revisited once the actual numbers were fully pulled together and reconciled. Left as drafted and signed, the plan would have handed Genevieve a larger ownership stake relative to what she had actually put into the company over the years, and correspondingly diluted Samson's position below what his own contributions justified.

This is a common trap in small companies that convert shareholder debt into equity informally, without a lawyer or accountant checking the underlying numbers first. A debt-to-equity conversion is not simply a bookkeeping entry that quietly erases a loan from the books. It changes what each owner actually holds and what each owner is entitled to going forward, including on a future sale of the business or a dispute between the owners. If the conversion price, meaning how many shares each dollar of debt converts into, does not reflect the actual value each person put in, one owner ends up quietly overpaying the other in ownership terms, and that unfairness becomes baked permanently into the company's structure from that point forward.

Because Samson and Genevieve trusted each other completely and had not been tracking the loans with much precision, neither of them had noticed the gap building up over the years. It was not a dispute yet, and it never became one. It was a plan quietly heading toward an outcome neither of them had actually intended or agreed to, caught only because the inherited file was reviewed properly against source records before it was finalized, rather than simply signed as handed over.

What we did

We started by setting the unfinished conversion documents aside entirely rather than trying to patch them, since building on an inherited draft that already carried a flawed assumption risked repeating the same error in a slightly different form. A clean rebuild from source records, starting from nothing rather than the previous lawyer's working file, was the only way to be genuinely confident the numbers were right before either owner signed anything binding.

From there we worked through the company's bank statements and Samson and Genevieve's own personal records for each loan advance, month by month, alongside Luc, their accountant, to build an accurate ledger of what each of them had actually put into the business and when they had put it in. This took considerably longer than either of them expected, since several years of informal, undocumented lending do not reconcile quickly against bank records alone, but it was the only reliable foundation on which a fair conversion could actually be built.

Once the ledger was substantially complete, we calculated what a conversion would look like if it were priced to reflect the true, uneven balances rather than treating the two loans as though they were equal in size. In practice this meant Samson converting a meaningfully larger portion of debt into shares than Genevieve, in direct proportion to what each of them had actually contributed over the years, rather than the even split the earlier, unfinished draft had assumed without either of them ever actually deciding it should work that way.

We then explained the difference to both owners directly and in plain terms, showing them the reconstructed ledger side by side with the previous draft so they could see exactly where the assumption had crept in and why it mattered for their future ownership and any eventual sale of the business. Neither of them had understood, until they saw the two documents next to each other, how significant the gap between the two loan balances actually was.

With that understanding in place, we drafted a new conversion agreement priced strictly against the reconstructed ledger, along with updated corporate records reflecting the new share issuance accurately, so the company's minute book matched what had actually been contributed and agreed rather than what an earlier, unexamined draft had simply assumed.

Finally, we recommended a simple practice going forward: any future loans from either owner to the company would be documented in writing at the time they were actually made, with the amount, date, and basic terms recorded, so the company would never again have years of informal lending to reconstruct from memory before a major decision like this one.

The outcome

The conversion was completed on the corrected terms, with Samson's shares reflecting the larger amount he had actually put into the business over the years and Genevieve's shares reflecting her smaller but genuine and important contribution. No shares had been issued under the earlier, uneven draft, so there was nothing to unwind, buy back, or renegotiate after the fact. The problem was caught while it was still just a plan on paper, which is the outcome that avoids the far harder conversation that would have followed a mistaken issuance discovered years later, closer to a sale of the business or a falling-out between the two owners.

Genevieve, to her credit, was not upset once she understood the numbers behind the correction. She had assumed, in good faith and without any bad intent, that the earlier draft reflected something both she and Samson had actually agreed to, rather than an unexamined default that had simply carried forward from an early conversation neither of them clearly remembered. Once she saw the reconstructed ledger laid out plainly, she agreed the corrected split was the fair one, and the process did not create lasting friction between two people who had otherwise worked well together for years and intended to keep doing so.

The company came out of the process with a minute book that actually matches its real ownership, and with a habit of documenting future loans in real time rather than trusting memory and an inconsistently updated shared spreadsheet. Nothing about the underlying business changed as a result of the correction. What changed was that an unfair outcome, quietly built into an inherited draft neither owner had fully scrutinized, never became permanent, and the cost of catching it was measured in weeks of review rather than years of consequence.

What you can learn from this