Business Valuation Blog | Understanding Buying / Selling a Company

Partnership Dissolution: Using a Business Valuation to Buyout a Partner

Posted by Business Valuation Specialists LLC on Oct 3, 2018 9:56:00 AM

You've worked hard in a partnership for a number of years or even decades to build your business, but one way or another, it's time to dissolve the partnership. Whether it's a health issue, loss of passion for the industry or any number of other reasons, dissolving a partnership is tough enough without trying to figure out how the value of the business needs to be split. That's one of the many reasons why it's a great reason for using a business valuation to buyout a partner. It allows you to use the valuation report as the basis for the buyout using a report that is created by an impartial third party. Here's how the process works and how to make it work.

Partnership Dissolution: Using a Business Valuation to Buyout a Partner

Partnership dissolution can be painful on both sides of the situation. The partner who is leaving may have a certain amount of guilt, but also a certain feeling of entitlement after having spent years building up the business. The partner or partners who are staying may feel anger over the partner who is leaving, feeling abandoned in the business and feeling entitled to hang onto a larger share of the company. Many businesses, and friendships, are split apart over the issues that may arise during a partnership dissolution.

But who is in the right in this situation? Partnerships should usually be started with a partnership agreement, but this is unfortunately not always the case. When the partnership is then dissolved later on, there is no agreement as to what should happen to the business property and assets at that time. The partner who is leaving may feel that they're leaving a complete company behind, and therefore deserve the share of the retirement that they won't otherwise achieve when they leave. The partner left behind may feel that they are having additional burdens placed upon them if they want to keep the company running, robbing the business of vital assets and equity and, in turn, their retirement funds. Which party is in the right?

Because of the hard feelings that can come out of situations such as this, many courts demand that the fair market value be determined by a certified business valuation specialist. A certified specialist is an independent third party who has no stake in either side of the partnership, ensuring that their valuation will be impartial and fair to both sides. The methodologies they use have been tested to hold up well in court, so the report they provide will deliver a fair and equitable value to each partner. For this reason, having a professional business appraisal performed at the dissolution of the partnership gives you a great point to start negotiations.

Though a partnership dissolution is a difficult, stressful time, using a business valuation to buyout a partner helps reduce that stress while providing you with a solid basis for determining the overall value of your business. Many businesses use business appraisals created by a certified business valuation specialist to ensure that the calculations and report that is created are completely impartial to either side of the dissolution. This makes it much easier for both sides to agree, as the value is determined by an independent third party.

Topics: using a business valuation to buyout a partner