Business Valuation Blog | Understanding Buying / Selling a Company

Being a small business owner is both exciting and stressful and has significant benefits and responsibilities beyond a typical employment position. Taking on all of the ownership responsibilities yourself or considering a partnership is a critical decision you may need to make at the beginning of the venture and afterward, once the company has been operating for a number of years.

Circumstances may decide this for you, or you may have more control over the process. Either way, here are a few things to consider when thinking about what is best for you.

Can You Manage Everything on Your Own?

This is probably the first thought that goes through your mind when starting a new business or potentially buying out existing partners. Do you have the experience, drive, and time to accomplish the day-to-day operations involved with 100% ownership? The answer will rely in part on the structure of the operation and how much you can delegate to employees, as well as your general desire to answer to no one but yourself.

Do You Have the Capital to Invest and Maintain Adequate Cash Flow by Yourself?

This is especially critical in the early stages of operation when you are trying to establish the business and before you have developed the levels of revenue to sustain and grow. Most business owners should expect a drain on their personal funds during this period unless they bring in working partners or silent investors to alleviate the burden.

Are You Having Trouble with Certain Partners?

This issue might be the most challenging one you face as a business owner during all phases of development and growth in the company. Bringing in the right partners and investors who match your goals, complement your skill set, and seamlessly get along with you both personally and professionally might seem like an impossible task. Developing and maintaining a high level of trust and compatibility with other people in business and life is something we all strive for but is rare to find over the long haul.

If you do, work hard to hold onto those relationships and continue to be successful. If philosophies change and you find yourself constantly butting heads with existing partners, you may have to decide if a change makes sense for the better of the business and yourself. Being your own boss is generally thought of as a great situation, especially later in your career, when you have all the tools to be successful. Many small business owners have found the right formula to work well with their partners and share the burdens and successes of ownership.

As a majority owner or equal partner in your business, there may come a time when you need to settle a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are a few things to focus on that will impact the agreement and it is common to look for guidance and assistance, including the engagement of 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 when these situations occur? Proactively handling these eventualities is never a bad idea and is quite common for rapidly growing businesses that are frequently looking for new investors to manage capital funding requirements and add value.

Is the partner or minority shareholder a key contributor to annual revenue? If so, 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 value of his or her shares in relation to majority ownership? This topic is commonly debated in valuation assignments where the shareholder may not have the same level of control as a larger investor, or it would be more difficult to attract a replacement given the lesser interest.

Given these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, a dispute may ensue which may drag out the process and even lead to litigation between the parties. Engaging with a certified professional business appraiser will provide an independent, unbiased assessment of value which will hopefully facilitate a fair settlement.

In any case, when a minority owner or partner opts to buy out, it may warrant the need to formally update the value of the business and associated shares so you and any remaining investors can better understand the overall current status of the company. The benefits of having an independent appraisal of your business and the underlying assets can go well beyond these immediate concerns such as assisting with future growth plans and reviewing your tax and accounting requirements.

When you are considering a "divorce" from a partner, it can be very messy trying to figure out an equitable solution to dealing with your business, especially in community property states. Both sides want to benefit from the deal, and it can be hard to find a solution that everyone can live with, especially when one or both of the spouses want to continue working in the business and the parties are not willing to work amicably towards an agreement. But a divorce business valuation can provide a quality valuation of a company that uses standard practices by a qualified, impartial appraiser to determine a fair value and a fair deal for all concerned. Here's how getting a company valuation works in a divorce works and the specifics of which valuation methods are used in this situation.

Using a Business Valuation to Get a Fair Deal in a Partnership Divorce

• It's important that you get your valuation of a company through a qualified, certified business valuation appraiser. Because a professional appraiser has gone through the training and nows the appropriate standards to use in your situation, doing so will help you avoid spending money on an appraisal from an untrained person that may not hold up.

• One method often used in business valuation is the market approach when looking at comparable businesses. By taking into account different business attributes and investment risks, it's possible to develop a comprehensive valuation that is fair and equitable to all sides in the business.

• Though it's common in non-adversarial situations to use a comparable transaction method under the market approach, the most common data source only go back a single year, but doesn't address prior years. Because a seller in non-adversarial situations is often actively trying to paint a good picture of the business income to get the most out of the sale, this approach doesn't work well in a partnership divorce business valuation.

• When a qualified business valuation appraiser is used, it's easier to find an equitable solution to the problem. This is especially important in situations where there are allegations that one party has not been running the business honestly. Because a qualified valuation specialist can study the figures that play into the business' final valuation, it's easier to locate potential problems or mis-reported figures.

Though partnership divorces are, by nature, painful and emotional, coming to a fair and equitable valuation for your business doesn't have to be.