How do I value my partnerships in a business?

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The first flush

In the first flush of enthusiasm in setting up a new business, or in taking an existing business one step higher by establishing a partnership, it may be that a partnership agreement is seen as unnecessary. After all, you’ve been mates for years, right?

It may also be a business partnership where the partners are also life partners, and formal agreements seem superfluous.

Either way, it is best practice to have a properly crafted partnership agreement, to specify certain legal aspects of the arrangement:

  • Financial contributions
  • Profits and losses
  • Obligations and rights
  • Decision making: majority vote, unanimous vote, or can a single partner decide?
  • Dispute resolution processes
  • Exit – what happens should a partner decide to leave?
  • Term – a finite time, or the life of the partnership?
  • Termination – what process will apply when the partnership or business is wound up?

Financial contributions noted above may be 50:50, but may not always be so. Sometimes a silent partner will be taken into an established business, bringing with them some funds in order to improve the financial status, possibly with a view to arranging finance for expansion.

A further complexity may arise where a partner brings an asset into the partnership for business use, but either does, or does not, transfer title of the asset. Such transactions need to be carefully considered and documented. At a later date, should that partner exit the arrangement, there will then be no doubt as to whether the partner still retains full ownership, or the business/partnership has title. In the latter case, the value of the asset would be apportioned appropriately.

The next piece of the puzzle

There are essentially 3 methods of establishing the value of a business.

1. Asset valuation

A professional valuer will determine the current value of both tangible assets (equipment, stock, etc) and intangible assets (intellectual property, goodwill, etc) and from this will be deducted the amount of any liabilities to determine the net asset value of the business.

 This method suits where a business holds substantial bricks and mortar assets, but is less suitable for say, a marketing business that works from a small office with minimal equipment other than desks, computers and such.

2. Market value

This method compares a business with others in the same industry and with similar size, structure, customer numbers and so on. It may be that several comparisons are needed to arrive at a fair valuation.

3. Income valuation

This method analyses current and future sales volumes and prices to arrive at a valuation. It works for established businesses with an ongoing track record of sales figures. With limited data available, it does not work for newly established businesses.

 Best laid plans

Partners leave partnerships for many reasons. Perhaps a business partnership that was also a life partnership ends when the couple part ways. It is not compulsory for the business partnership to end and will depend upon individual relationships.

Perhaps there have been disagreements, and what started amicably has become unworkable. Possibly the partnership was only intended to serve as security in the establishment phase, and now, with the business on a steady trajectory, the partnership is being amicably dissolved.

Whatever the circumstances, the terms and processes should be followed in line with the partnership agreement, and the partnership valuation amount that the partner takes will likewise be properly defined.

Owen Hodge Lawyers and Commercial Law – a quality partnership. It will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help.

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