- posted: Aug. 30, 2022
- Business Law
It’s common for a business to have more than one owner, each with a substantial financial stake in the company. But partnerships don’t always last, either because businesses fail, owners disagree or one or more of them retires or moves on to their next venture. This could require splitting up the value of the company or buying out the departing owner.
In a closely held business, there is no market value for shares of stock. Instead, it is necessary to determine the value of the business and its assets as a whole in order to determine the amount payable to each departing broker. There are several methods of valuation from which you may choose.
If the company closes down or doesn’t generate significant income, the adjusted net asset method is a useful option. This involves adding up the value of the business’s assets and subtracting its liabilities as reflected in the balance sheet, then modifying that figure to reflect reality by, for instance, correcting inaccurately reported assets and liabilities.
If the business is making a profit and will continue to operate after an owner is bought out, the capitalization of cash flow method may produce a better valuation. It begins with determining the business’s recurring income and expenses over a given period and dividing the resulting net figure by the cap rate — a percentage based on the rate of return that the owners can expect to generate in the future. This results in an amount substantially larger than the adjusted cash flow.
If the company doesn’t have a steady cash flow, but you have a reasonable way of projecting its future cash flow, the discounted cash flow method might be a better valuation option. It adjusts the projected cash flow to take account of the time value of that money. Time value reflects the fact that you can use money you have now, so money you have not yet received decreases in value the longer it takes to receive it.
Another way of valuing an ongoing business is to hire a qualified business appraiser to determine its fair market value. The appraiser will typically compare the sales prices of similar companies in the same market. You and your partners might not agree on the appropriate valuation method for your company. In all cases, it is helpful to an attorney familiar with the problems of business divorce to negotiate a method that is fair to you. You and your partners can also submit the issue to mediation, a means of settling disputes outside of court with the help of a neutral third party.
Hemmer DeFrank Wessels, PLLC is a full-service litigation law firm in Kentucky experienced in counseling clients involved in business breakups. Call us at [PHONE] or contact us online to schedule a consultation at our Fort Mitchell office.