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    5 Replies Latest reply on Jun 29, 2013 9:16 AM by 99thin

    1/3 partnership advice

    kathie0330 Wayfarer

      I am considering buying 1/3 of a business that I used to be very involved in.  In short the current 3 partners do not get along and 1 wants out. The other two partners offered a very low amount to but the 3rd out which will never be accepted. I am offering 5 times that amount. Here are a few questions.

      How should 1/3 of a business be evaluated? Let's say sales are 1.5 million.  The partner wants 150k for,his third.  But, has owner has only seen an owners withdrawal of 15k for the past 5 years. Should the ROI of that amount somehow be taken into consideration? Isn't 1/3 of a business worth less than the whole divided by 3 when only one person wants out?

      There's much more to it....but let's start simple and answer questions as we go!

        • Re: 1/3 partnership advice
          koln123 Tracker

          Since you were heavily involved in the business, you are one of the few people that has in depth information as to whether the person that wants out will be good, neutral, or bad for the business.  This will help answer your question if 1/3rd of the business is worth less when 1 of 3 partners wants out.   Generally if a business is profitable and creates income for the owners, they will be reluctant to leave.  Clearly knowing why they are leaving is important.

           

          There are details to look at when evaluating the Gross Receipts versus what the owner's draw is.  Is the owner's $15K per year a true reflection of what is left over?  In some cases the owners choose to take as little as possible for themselves in order to help the business grow.   $15K seems very low for $1.5 Million in Gross Receipts.  Determine if the expenses that result in this figure are true fixed expenses.  Is the business spending far more than most businesses do reinvesting in other areas or other soft costs?  If so, the $15K could easily be higher and not necessarily hurt the business.  Will the other owners increase the takeout if you buy into the business?   If not, then the business needs to have significant long term growth and future equity to justify $15K per year if you pay $150K for 1/3rd of a company that generates $1.5 Million per year.   

           

          Do you have a very good rapport now with the other owners?  Do you feel the remaining owners have been making good decisions?   If you only continue to make $15K per year, what is the estimate on how long that amount will continue before it rises significantly?   What and when is the future benefit to you if it takes 10 years in salary to only break even with your initial outlay?   It needs to a combination of increased owner's draw, future growth and future equity in the company.   SBLD

            • Re: 1/3 partnership advice
              Moderator Ilona Ranger

              Great advice koln123. Kathie0330, wishing you the best of luck in your endeavor, please keep us all up to date on how this all will turn out for you.

               

              Ilona

              • Re: 1/3 partnership advice
                kathie0330 Wayfarer

                Yes, one partner wants out. Long and short the partner is my x-husband.  We founded the business and after we moved across the country and started simular businesses his relationship with the partners began to deteriorate. For many years I was the buffer between all of them and now that I am not part of the partnership things have gotten worse.  I m still involved with all the businesses and we're thinking it could be a win-win for all concerned if I took over this one.  Naturally all was thought of after the settlement and no $ needs to be exchanged!

                 

                The 15K is not a true evaluation.  The partners who actually run the business take very high salaries leaving very little to be distributed.  At some point this could change, but, for right now I have to look at it as though it won't.  I would also begin drawing a small salary (which the X currently does) but I do not feel this should be calculated as it could be decided against at some point.

                 

                The company is growing and I have always felt that I could make a greater difference than the X because I get along with the partners much better than he does.  I do think that 10 years is way to long to re-coop and investemnt which is why I feel that offering less than the 1/3 is justified.  I had a friend mention that when she was in a simular situation wanting out of a business, she was told not to expect the full 1/3.  That a business as a whole is worth more than the parts and to expect 25-75% of the whole.  Has anyone heard this? Is there a standard calculation I could ge my hand on?

                 

                Thanks for the thoughts everyone!

                 

                PS  This is not something that is going to become my main income, but is a nice little influx of cash annually for doing very little or what I do anyhow.

                  • Re: 1/3 partnership advice
                    koln123 Tracker

                    The salary issue still seems to be outstanding based on the answer.   If the other partners take a high salary, it is not clear why the new 1 (You) of the 3  33% owners would continue to receive only $15K per year.  If this is somehow due to the X, then that may be the reason.  However, if you get along far better with the current owners than your X does, and would pay close to real value for the 1/3rd ownership,  and will be providing similar levels of value and effort to the business, it seems a similar high salary should definitely be in the cards for you.   If a partner leaves due to problems with the relationship rather than hard core problems with the business, then it is very debatable if the partner leaving should expect less than 1/3rd of the normal value of the equity.  SBLD

                    • Re: 1/3 partnership advice
                      99thin Newbie

                      very useful information. thanks a lot for this.

                       

                      thanks

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