Determining Value Early On is a Good Idea for Business Partners

Determining Value Early On is a Good Idea for Business Partners

Partner Buyout:  Determining Value Early On is a Good Idea for Business Partners

I was recently asked if I could help a company develop a valuation methodology for their business so that if one partner wanted to buyout the other, they would already have an agreed up on formula valuing the business.

Two weeks later I got a different call from another owner asking for the name of a valuation consultant because one partner had died and they needed to get a valuation to figure out the value of the Company.  The spouse of the deceased partner was getting an appraisal on the business done so the other owner was hiring a separate firm to do the same thing.   They were planning to base the future value on an average of the two.

Given these two things happened in the last two weeks, I thought this topic was worth sharing.  When it comes to partner buyouts, company valuation is one of the biggest roadblocks to completing a buyout – especially if discussions on business value are only started at the time of the buyout.  Partners often struggle over price differences and you can guess which partner (buyer or seller) thinks the price is higher. Sequin Saturday

Proactively working to determine an agreed upon approach to valuation can help in three ways.

  • Partners more likely to agree, if focus on methodology (not set value) and doing it early
  • The process can make owners start to think about value and ways to increase it
  • Can be coupled with insurance products to create self funding buy/sell in a case of death

A fourth reason that may be most important to a potential ‘buying owner’, is that proactively developing a buyout plan (even years in advance) allows the buying owner to develop a buyout financial plan that can be funded with debt. By using debt, the buying owner can truly acquire or pick up the other partner’s equity ownership.  Whereas if equity is used to fund the partner buyout, the buying owner is taking out one partner but then brining in a new partner.  For many buying owners, adding a new business partner defeats a key reason for doing the partner buyout in the first place.