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Thread: Business Valuation

  1. #1
    Gold Member Singhms's Avatar
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    Business Valuation

    Hi All,

    I am busy doing a cc association\partnership agreement.

    Dave gave me a good template that i am using 97% off.

    The only part i am still having major problems on is the business\shares valuation.

    e.g. if i want to\or my partner wants to sell out members interest in a few years time how do we value the business to ensure a fair market related value?

    I would greatly appreciate any help on this one.

    Thanks,

  2. #2
    Site Caretaker Dave A's Avatar
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    My personal view is when it comes to the partnership agreement you either need to stick to book value as the guide, or have a fairly simple and unambiguous process written into the partnership agreement as to how the fair value will be calculated.

    Am I correct in suggesting it's the exact nature and content of that second route that has you scratching your head right now?
    The trouble with opportunity is it normally comes dressed up as work.

  3. #3
    Platinum Member sterne.law@gmail.com's Avatar
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    I agree with Dave. I normally put a calculation method in, keeping as simple as possible
    Eg 18 times monthly profit (averaged over last 3 years average profits), sometimes factor in asset value as a percentage or use 3 different methods and average
    Or the average price of 3 independent business brokers

    Even book value needs some quantifying - because loan accounts and tax mechanisms may distort book value.

    Another curveball or thought - is differnet valuating methods related to time periods (to an extent the asset and profit combination does deal with this) but the main thrust behind this idea is to stop people form taking profits and selling up early - which can be a consideration.

    Business valuation is one of those things whereby any number can be thrown on the mat and validated with some calculation or formulae.
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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    A useful method I've heard of in the past, is to do the following:

    The aggrieved party "A" (the one who wants the separation the most) puts a value on what he wants to be paid for his shares in order to leave. This is his idea of the value of the company.

    The other partner "B" now has the option of either paying him the requested amount and end up with full ownership, or to rather sell his shares to "A" at the price mentioned by "A".

    This keeps the offer/request made by "A" very honest as he doesn't know if he'll be buying or selling. It also puts a very realistic value on the business as often potential growth and reputation are intangibles that make a company worth more than just its assets and historical profits.

    It obviously has pitfalls, such as if one partner does not have any financial means to buy the other out, then this won't be a fair negotiation. So it should always have an opt out option where you go back to the valuation methods already mentioned.

    But it does offer a clever way of getting to a genuine market related value.

  5. #5
    Diamond Member wynn's Avatar
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    Go to Mark Corke's site and get the free email series on preparing your business for sale, http://www.prepareyourbusiness.co.za/

    This would be good practice just in case you want to sell to somebody else.
    If you keep it up to date you will know the value of your business at any time in the future, all you do now is decide on what percentage the resigning partner will have to pay in that event.

    Remember in case you do resign, put a mechanism in place now to get any sureties you may have signed obo the cc cancelled.
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    Site Caretaker Dave A's Avatar
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    When it comes to setting a valuation clause in the partnership agreement, you really have to keep in mind why it's there. As Anthony points out in his one method
    Quote Originally Posted by sterne.law@gmail.com View Post
    the main thrust behind this idea is to stop people form taking profits and selling up early - which can be a consideration.
    The normal reason for including a valuation clause in a partnership agreement is to protect the remaining partners from a crippling claim in the event that they become obliged to buy out an exiting partner's interest (normally per force, for example upon the death or incapacity of a partner).

    This means that whatever method you adopt, it really should provide a conservative value at most. And if you don't like that, tough! When it comes to these things it's what is in the best interests of the business that counts most here.

    [EDIT: Maybe that came out a bit harsh. Probably more appropriate to say: If you don't like it, you probably haven't thought the issue through properly.]

    When it comes to considering a sale to an external party, the purpose of the valuation clause being included in the partnership agreement is to provide the remaining partners protection against such a "threat," not to determine a fair value for such a sale.

    So the motive behind this part of the OP is rather important:
    Quote Originally Posted by JWalker View Post
    e.g. if i want to\or my partner wants to sell out members interest in a few years time
    Have you got a particular circumstance in mind that goes against this principle?
    Last edited by Dave A; 02-Dec-10 at 01:25 PM.
    The trouble with opportunity is it normally comes dressed up as work.

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    arbitration clause

    & if the parties cannot arrive at a decision an arbitration clause is your answer.arbitrators findings are final & binding on both parties. selection of arbitrator, & how simply arguments are to be presented saves a lot of potential legal headaches

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