How to calculate how much a business is worth in a partnership split
As your business grows, it will naturally experience growing pains as it responds to new challenges, adjusts to new trading landscapes, and measures up against competitors. While the business matures, the operational and management structure of your limited company will also change.
Throughout your partnership with another director, a time may come when they will exit from the business to pursue new goals or because they can longer support the business. Both partners will enter negotiations to discuss the future of the business and its ownership, which will commence with a valuation of the business.
What happens when a partner leaves a partnership?
The possible outcomes of a partnership split may include a partnership buyout when another director buys the shares, sells the business, or closes the business.
- Partnership buyout – When a partner buys the shares of another partner to secure control over the business
- Sell business – When both partners decide that it’s in the best interests of the business and partners to sell the partnership business as a whole
- Close partnership – All partners may decide to divide the profit, split the partnership and close the business
When a partner chooses to leave the business, the partnership settlement will divide business interests and assets based on how much the business is worth. How is the selling price of a partnership determined? The selling price of a business partnership is determined by carrying out a business valuation.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
How do you value a business partnership?
A common question asked in the event of a partnership split is - how do you value a business when one partner leaves? To value a business in a partnership split, or to value the buyout of a business partner, you will need to appoint a professional business valuer.
A business valuer or a business transfer agent specialising in business valuations (also known as a business broker) will require three years of company accounts to value the business. There are different methods to value a business, from assessing asset value, discounted cash flow and price-to-earnings ratio.
Asset Valuation - Total value of assets owned by the business, and their future value
Price-to-earnings ratio – Calculate net profit and multiply this by multiples set for each sector
Entry Cost – Calculate how much it would cost to set up a similar business and get it operational
Discounted Cash Flow – Based on forecasted future cash flow
Industry rules of thumb – Compare previous sales to determine the going price of a business
An experienced business broker will have built a database of comparable sales data which can be used to compare how much similar businesses sold for. This can help to accurately calculate the saleable value of a business.
Disputing a valuation in a partnership split
If a partner disputes the valuation and fails to negotiate a settlement agreement, alternative dispute resolution may present a solution. Alternative dispute resolution can take the form of mediation which is when a mediator is used to facilitate communication between both parties.
At Selling My Business, our expert team of business valuers can value a business for a partnership split. We have over 60 years of experience in selling and valuing businesses, so we understand what factors influence the value of a business and how to increase business value.