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    2 Replies Latest reply on Apr 29, 2011 9:13 AM by Bridge

    Buyout offer for a Business.

    levka Newbie

      Would like to get any feedback on my situation. Any information would be appreciated.


      Back Story


      2 years ago retail store i was working for went out of business. I was owed a lot of money by the owner and since he was unable to pay me back we agreed that i would take whatever was left in his stores as a compensation for money owed. I was happy with that agreement since i was going to open a store of my own and i needed equipment, hardware and some inventory to get up and running. At that point ex co-worker of mine offered to be a 50/50 partner in the business, to which i agreed. I would do management and sales and he would do services and maintenance. My thinking at the time was that since our business is seasonal, on some months sales will be much larger that services and some months other way around.


      Current Situation


      Recently, me and my business partner been having a lot of arguments and generic problems on how business is running and what should be done about it. I'm at the point where i no longer want to argue and feel like buying out his half of business would be the best idea. Unfortunately when we started no partnership agreement was created (stupid on my part) and this is why things are getting complicated. I offered him a buyout price that i thought was fair. That offer was based on all the hard assets that company currently has plus original cash investments (security deposits and such) and split in to half. I did not count equipment and inventory that I originally brought to the business, since that was my personal goods. On a side note, I’ll be honest the business is not doing all that great, currently we are breaking even.


      My partner refuses to accept that offer, justifying it by saying that all the time he put in to helping setting up the store is worth something also and that business value is calculated differently anyways.




      1. How do you calculate value of business.



      I will be meeting with lawyer next week to discuss this further, but was wondering if anyone can suggest what my next step should be.


      Thanks in advance,


        • Buyout offer for a Business.
          ArcSine Scout

          Actually, you and your partner are both partially correct as to the pricing of a biz. Since the details are the stuff of which entire books are written, this is an oversimplification, but very generally the value of a business would be the greater of two amounts: (1) the "present value" of the biz's expected future cash flows; (2) the liquidation value of the hard assets. (When (2) > (1) it's said the business is "worth more dead than alive", meaning that owners would do better to sell the assets than to continue operations.)


          Essentially, you have offered him a price based on the viewpoint of (2). His insistence that a "business value is calculated differently anyways" is probably a reference to the pricing methodology of (1).


          Where he is incorrect is the thinking that his time and effort to date entitles him to some monetary compensation. The very essence of business ownership is that one puts sweat-equity into building something that hopefully will generate future profits. If it does indeed generate profits, therein is the reward and payoff for the effort. If on the other hand profits fail to materialize, that's the "risk" part of business ownership, and there's no entitlement to some reimbursement. Think of the Vegas analogy: the sweat equity you put into a biz is similar in some respects to the cash you plunk down at the blackjack table. If you win, the payoff is yours to keep. If you lose, though, you certainly can't march up to the casino's front office and demand to be reimbursed for your loss.


          If he insists that the business should be priced not on the current liquidation value of the hard assets, but rather on the present value of the future profits of the biz, he's shooting himself in the foot (if, as you say, the business is simply breaking even, and IF it's quite unlikely that the the biz will get onto a profitable trajectory anytime soon). The value of breaking even is just zero....I wouldn't pay anything for a breakeven biz, since I could sit on my couch all day and break even---without paying anything for the privilege!


          When you meet with an attorney, make sure it's one who's familiar with at least the fundamentals of biz valuations. He / she will fill in more of the details to which I've just generally alluded. Bottom line, though....if there's no realistic expectation of the business throwing off significant profits in the reasonable future, then your buyout offer based on the current val of the tangible assets is most likely higher than any "future profits" pricing, and hence it's an offer your former partner should accept before you change your mind.


          In the end it usually comes down to negotiation, but the negotiations will have a more favorable outcome for you if you keep the above concepts in mind. Best of luck!

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          • Buyout offer for a Business.
            Bridge Navigator

            Here's one way to tell if you made a fair offer - would you sell him your half of the business for the same amount you offered him?


            If not, put that offer on the table - buy him out or sell to him for the same amount.  From a negotiating stand point, you couls ask him what half the business is worth - and then ask him to write a check for that amount and sell him your half.


            If you want to get real cute, write a number down and put in in an envelope, tell your partner that you are willing to either buy him out for the amount in the envelope or sell your half for the amount in the envelope.  His choice, does he want to be a buyer or seller.


            I have found there is usually a difference between what people "value" things at at what amount they are willing to write a check for.


            Best of luck,


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