Business Valuation Blog | Understanding Buying / Selling a Company

If you have a partner who is looking to leave or is considering bringing in another investor into your small business, you will want to negotiate a fair buyout or buy-in with those involved to avoid a dispute. As certified appraisers, we see many instances in which the process has dragged on for months with no agreement, due in large part to the fact that the parties on each side of the transaction cannot reasonably agree on price.

There’s a lot at stake when valuing ownership shares amid the exit or new entry of investors, and it is common for different perspectives on value to become a sticking point. Before you enter into your first serious conversation about value, you should engage with a professional appraiser who can provide an independent, unbiased opinion of the value of the company as well as the percentage ownership share involved. They will work closely with you to gather the data needed to understand and analyze your business's financial details, while researching the specific industry and market in which you operate. You will have an ongoing open line of communication with the valuation expert to highlight any nuances and adjustments that need to be considered with your business while providing further insight that isn’t readily apparent from the income statements and balance sheets.

One of the frequent areas of dispute in these negotiations is whether to apply discounts to minority ownership interests and, if so, the level of those discounts. This approach may be appropriate if the ownership is considered non-controlling, which typically involves a share of less than 50%. These discounts reflect the lack of control a shareholder would have over the company's operational decision-making, as well as a reduced ability to sell their shares in the market to a third party due to the non-controlling interest.

It will be important to discuss all these topics during the appraisal analysis with your valuation professional, so everyone is on the same page regarding the underlying factors that will affect the value of your company and its associated shares.

To avoid wasting time in the negotiating process and reduce the chances of a serious dispute or even a legal battle, advise the parties involved that you will be engaging with a certified appraiser to conduct an independent valuation of the business and the percentage shares involved with the buy-in or buyout. Once the report is delivered, you can share the results and begin settlement discussions from a non-contentious point, greatly increasing the odds of an amicable transaction.

Remember to do this early in the process to firmly establish the ground rules and maintain a level of control over the process. As a business owner, the end result will impact you more than anyone else involved.

As a majority, equal, or minority shareholder in your business, there may come a time when you need to address a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are certain things to put your focus on that will greatly impact the negotiated agreement, including engaging with a certified valuation professional.

Does your company have an internally developed buy-in/buyout or another type of operating agreement that lays the groundwork for assessing value in these situations? Proactively addressing these eventualities is never a bad idea and is quite common among rapidly growing businesses that are frequently seeking new investors to manage capital funding requirements and add value.

Is the partner a key contributor to annual revenue whose departure would affect the ongoing success of the business? Is there a non-compete agreement in place to buffer the effects of this departure in the short term? If not, should the company be valued with the anticipated losses in sales, or is there a mutually agreeable arrangement to replace the partner and offset this reduction?

If the investor is buying out of a minority interest, should discounts be applied to reflect the lack of control and marketability? This topic is commonly debated in valuation assignments, where the shareholder may not have significant decision-making power, and there may also be an inherent difficulty in attracting a new investor given this lesser interest.

Given that these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, the likelihood of a dispute may be high, and could potentially drag out the process, in some cases leading to litigation between the parties. Engaging a certified professional business appraiser will provide an independent, unbiased assessment of value, which will assist in facilitating a fair settlement.

Whatever the situation with your company, when a partner or investor opts to buy out, it will justify the need to formally update the business's value and associated shares so you and any remaining owners can work through this process to a successful conclusion. As a bonus, the additional benefits of an independent appraisal of your business and its underlying assets can go well beyond these immediate concerns and support future growth plans as you forecast your business's future.

When business partners decide to part ways, a fair and accurate valuation of the company is a critical step in the process. Whether a partner is retiring, moving on to another venture, or selling their stake for any other reason, determining the current value of your small business provides a high likelihood of a smooth transition while minimizing the chance for a dispute.

An independent, unbiased appraisal ensures that the partner leaving the company is compensated fairly based on their stake in the business. Without a professional third-party valuation, either the departing or remaining partners may end up at a financial disadvantage, leading to conflicts that could quickly turn into a legal battle.

When partners disagree on the value of the business, this dispute will delay or even derail the buyout process. An objective appraisal from an outside professional mitigates these risks by providing a transparent, supportable analysis along with a narrative report presentation that all parties can agree upon.

If the buyout requires financing, lenders and investors will often require an accurate business valuation before approving any funds. A certified valuation strengthens the case for securing loans or attracting new investors to support the transition.

Business buyouts have significant tax and legal implications. The appraisal will assist in providing compliance with these regulations and avoid legal issues that could arise from improper financial disclosures. The business’s financial health is also at stake should a buyout not go smoothly. By engaging with a qualified and experienced appraiser, the remaining partners can maintain stability and continue operations without financial strain or uncertainty.

A documented valuation will set a precedent for ongoing business activity while providing a reference point and reducing ambiguity for future transactions within the business.

In summary, if you or your partner are considering leaving the company, one of the first steps in the process should be obtaining an independent business valuation. Engaging with a credentialed appraiser will greatly assist with ensuring fairness, preventing disputes, and maintaining business continuity. Seeking professional valuation services can safeguard all parties involved and provide a clear path for a successful transition.

When you started your business, your partner was a vital part of making it a success. But what is the value of that partnership? It may be a question you haven't really considered in the past. But now that they're moving on to another company, another opportunity or to just take it easy, suddenly the cost of buying out a partner is a real concern. A business appraisal can help make the process go much more smoothly. Here's why:

Why is a business appraisal important when buying out a partner?

There are a few aspects you'll need to consider during the appraisal process. The first is whether there are any existing agreements that were made previously on what will happen when a partner leaves the business. If you already have a buy-sell agreement and valuation formula in place, you may be bound to that agreement, provided that it was laid out in a fair manner and agreed to by all parties. Having this type of agreement in place prior to a partner deciding to leave the business can drastically speed up the process while mitigating many disputes over valuation.

What if you don't have one in place? Then you'll need to agree on the value of the partner's share in the business. Unfortunately, when one partner has been more involved in the operation or profitability of the company, that can quickly become a contested operation. At that time, having a business valuation performed can make a huge difference in how quickly the process proceeds for all parties concerned. But why is a business valuation better than sorting it out on your own or with an accountant?

When you work with a certified business appraiser to determine your company's value and the value of the exiting partner's share of the business, the appraiser has no stock in the outcome. This level of independence means that they can calculate the overall value without any bias. The certification process means they know exactly how to calculate that value in a manner that will stand up to strong scrutiny, because the methodologies they apply have been tested in a wide range of situations and found to be fair and equitable.

Beyond that, when it comes to calculating what a partner's portion of the business value should be, it can be an onerous task. Because business appraisers spend their days calculating the value of not one, but many businesses, in a wide range of situations, there are none as well situated to deal with your partnership's concerns. They're able to look at reputation, business activity involvement and similar concerns, while still being able to discuss and defend how the figure was calculated in the first place.

By having a business valuation in place when buying out a partner, you don't need to worry about negotiating back and forth over the cost. You'll have a solid value determined by an independent party. But when you do go through this process, make sure you use a certified business appraiser, as they'll have appropriate methodologies to properly value your partner's share. A business valuation provided by a certified appraiser holds up well to strong scrutiny, especially in legal or financial circles if you need help with a difficult personality or coming up with the money to make it happen.