A business structure is often one of the most critical aspects of its success. A business partnership works for the types of industries that require a high degree of expertise. Some of the businesses that most often operate as partnerships include:
- Real Estate Investment Groups
- Law Firms
- Physician Groups
- Accounting Groups
What happens when the time comes for one of these collaborative efforts to end? One of the critical components of any partnership dissolution involves a proper valuation of the business. Valuing a business when a partner wants out requires the support of business attorneys. The team at The Law Offices of Jonathan Fleisher, Esq. in New Jersey can help you with the process of dissolving a partnership so that all parties involved emerge with a sense of fairness and equity. Consider contacting our experienced business attorneys today at 732.360.6409 to schedule a business consultation for ending a partnership.
Business Partnerships
The Small Business Administration outlines two general types of business partnerships, depending on how liability gets distributed among the members. The two main forms of partnerships are:
Limited Liability Partnerships
Limited liability partnerships allow for a more even distribution of liability. This type of partnership protects each partner from the actions of other partners. Limited liability partnerships also provide personal protection for each member from debts that the business might assume throughout its lifetime.
Limited Partnerships
Limited partnerships designate a more significant level of liability to a single member, while all the other partners take on limited liability. The higher degree of liability comes with more tax burdens as well as more power and influence within the company. Startups often use limited partnerships. A single founder might agree to take on more of the liability while their team can work free of risk.
The Importance of The Business Valuation
The business valuation is the single most significant component of a partnership split. For example, one partner might bring an excessive amount of value to the company in knowledge, network, or invested capital.
Therefore, a fair valuation must take place. Most often, an independent third party can offer a more objective valuation of the company. However, a common practice is for each member to assess the company’s value on their own, then the average of these values becomes the final number.
Legal guidance can prove invaluable when undergoing the valuation process. If you are a member seeking a fair and amicable exit from a business partnership, the attorneys at
The Law Offices of Jonathan Fleisher, Esq. can steer you in the right direction.
The Anatomy of a Business Valuation
When it comes to the value, some vital numbers come into play. The most important metrics include:
Basic Financial Data
Actual financial numbers are where most valuations should begin. Some key data points include:
- Current Balance Sheets
- Current Profit & Loss Statements
- Bank Statements
- Tax Returns
- Current and Previous Budgets
Financial data offers critical information on the company’s health, offering a big picture of whether the state of the business is feeble or is performing robustly.
Assets
A company might have accumulated assets throughout its life. Common assets include:
- Trademarks/ Patents
- Land
- Buildings
- Accounts Receivable
- Equipment
- Inventory
Valuations should also include “soft” assets, such as the knowledge base of each employee or member, the company’s brand, or the overall intellectual capital that the company has developed.
Recent Profits and Future Earnings
Is there a pattern of recent profits within the last six months or a year? A valuation must include a proven profit trend and any sign that it may continue. Additionally, valuations consider projected future earnings and what a partner’s exit might mean for these earnings.
It is common practice to determine future earnings by multiplying projected yearly profits by the number of years. For example, if a business projects $200,000 per year for the next six years, then the projected future earnings for that period would come out to be $1.2 million.
Capital Needs
A valuation needs to take into account how much it would cost to buy out a partner.
What are the company’s capital needs? More specifically, would a partner’s departure affect the future operating capital? Such questions should figure into a valuation so that company can explore financing options so as to not fall short of the money it needs to function.
Types of Valuation
While all of the above elements must be factored into a company’s valuation, some details matter more than others. For example, when it comes to valuing a business when a partner wants out, there are two main approaches.
Asset-Based Approach
An asset-based approach focuses on the business’ assets when determining its worth. Both “hard” assets, like building, land, and equipment, and “soft” assets, like intellectual capital, weigh most heavily in an asset-based valuation.
Truly objective appraisals might not exist, but any business owner would be wise to seek out qualified appraisals to get the most accurate estimates of hard assets.
Market-Based Approach
A market-based approach sees the business in the context of the larger market. Specifically, it looks at how the company stacks up against competitors of similar size and type. An arguably more subjective approach, the market-focused valuation, can prove more accurate for businesses with few hard assets, such as software service companies, for example.
Consider Contacting an Experienced Attorney to Help Value Your Business
Valuing a business when a partner wants out takes time, diligence, and expertise. Consider contacting the experienced business attorneys at The Law Office of Jonathan Fleisher, Esq. today at (732) 360-6409 if you are considering ending a business partnership in the state of New Jersey. Our legal team can help you understand all of your legal rights and ensure that they remain protected throughout the entire process.