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PDtax
PDtax, CPA, MBA
Category: Finance
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Experience:  Tax professional and business consultant for 32 years.
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I am 50 percent owner of a business with my brother. We are

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I am 50 percent owner of a business with my brother. We are parting ways and are trying to divide or sell the business. It's a mobile home park that brings in about 30,000 a month. We owe no money on it at all. It was recently appraised at 3 Million dollars. My question is, if I bid against him to try to buy him out, what would be a reasonable amount to pay for his half interest in a property that brings in approximately 360,000 a year?
Submitted: 1 year ago.
Category: Finance
Customer: replied 1 year ago.
Relist: No answer yet.
Did everything go thru alright, because I had to reset my password XXXXX haven't recieved an answer yet.
Expert:  PDtax replied 1 year ago.
Hi from Just Answer. This is a duplicate question, but I do have a take on how to begin the negotiations.

Since you have an answer, please advise if you want my assistance. I'm PDtax.
Customer: replied 1 year ago.


I have not gotten an answer

Expert:  PDtax replied 1 year ago.
Ok. I saw a response to your question earlier, but I will help.

The thing with family negotiations is that the family and business relationships will impact the negotiations. And, there is an extra factor I will add for your consideration at the end. That being said, here's how I would look at it:

If the business is really worth $3,000,000, would $15,000 per month service the purchase debt? I'm assuming you will need to borrow the money to buy him out.

He will likely need cash to pay the capital gain on his interest. That portion of his cash will be needed soon, but certainly by 4/15/14, when his taxes will be due. Is the business incorporated, or do you own it as joint owners or other form, like an LLC?

Will he want or need to stay on to provide services? If not, his duties will have to be done by someone else, reducing what his value is worth.

Are each of you full time on site managers? If only one of you runs things, that will be a factor in price too.

This is a hard sort of thing to do without sitting down with you and reviewing the history, who does what, etc., so allow me to ask those questions to get more questions going. And there will be others.

The last thing is a test I add to any of these buy-sell negotiations. Since you are 50-50 owners, the value you toss across the table could be thrown right back at you as an offer for your half. Be ready to justify the additional things you will do as the sole owner, including hiring help, or otherwise measuring how much the other party may want to leave.

Once an appraisal has been done and the value is known to each, most people will focus on getting half of that balance. The problem is assembling that in cash.

The right way to look at it is to see if half of the income ($15,000 per month) is enough to service the note you execute with a bank or between each other. With nothing down, it's likely the $15,000 per month will take 10 years to pay off the note balance, even at low rates like today's 4% or so.

I answered you this way to start the analysis process. Each negotiation is different, but most I have been involved with that had appraisals started with that driving the value. If cash will be required, you might be able to say 'I'll give you $1,000,000 cash when we close" and he gets to take the 4 and run.

Let me know if you have anything more specific I can focus on.

PDtax
Customer: replied 1 year ago.


This is a corporation and we would buy him out completely. He will play no part whatsoever after that. We have a manger on site, etc. My question is, how close to the actual appraisal price for the park should I offer to buy him out and still know that I made a good deal?

Expert:  PDtax replied 1 year ago.
So far, you are relying on the appraisal to drive value. I don't trust appraisals, but acknowledge that they often drive these transactions.

I assume that neither of you draws a salary for work, just your share of the income. Can the rents be increased each year? Do either of you want to leave the business?

If you sell, your property taxes and insurance costs will likely go up. Just keep it in mind.

If you can buy him out with cash, you make a good return on your investment 180,000/1,500,000 = 12%. If you finance, you will not get an increase in your income other than rent increases for ten years. That's a long time to not make any money from an investment.

I would probably check with my bank and see what they would lend. If they would lend $1,500,000, it's likely any discount will be a good deal. I would also review things with your attorney and CPA in advance, since they will be able to advise with all the facts and a knowledge of the business and the parties.

If the bank says they agree $3,000,000 is a good value, and your CPA and attorney agree, I might start with a deal for $1,000,000 that the bank finances. Ten years is a long time to pay off a business purchase, and a lot of things can happen.

Thanks again for asking at Just Answer.
Customer: replied 1 year ago.


You ask if either of us want to leave the business. Both of us want to keep the business and it can't be split. I assume we are going to bid against each other until one outbids the other. Would it be wise to bid up to the 3Million dollar amount, of which I would owe 1.5 of that, because that's what an outsider would have to pay and they would still make money because the income covers the note plus more. Yes, the rent will go up as the economy allows. I can also put rentals on some of the spots where we just rent the spots as of now, so that would get the income up also.

Expert:  PDtax replied 1 year ago.
Thanks, XXXXX XXXXX helps me guide you.

Since the $3,000,000 appraisal is being accepted by each of you as a fair value, it is likely that your bid against each other scenario could indeed play out.

I would still go to my banker, CPA and attorney, and make sure this was a good deal for you to even consider. I will tell you that $360,000 pretax yield on an asset worth $3,000,000 is not a lot. My gut reaction is that the place is not worth $3,000,000. I don't know, it might just be my suspicious nature, but that seems like a high value.

I would want to consult with someone who understood multiples in this business. Being debt free is great, and adds to the value, but no one would be able to afford to spend $3,000,000 and buy it from you. Just the interest alone at 8% would be $20,000 per month. I will tell you if I was advising a buyer I would not recommend a purchase price of $3,000,000 for the cash flow you report.

I also would not revise the purchase price for the potential to raise rates. I asked you because if you owned the whole place, that's where your profits would come from. The other half of the park you are buying would pay for the buyout for years. When I advise someone to buy, I never let them pay for potential. It is worth what its current use and value is to buy it.

I made a preliminary check on RV park values as a multiple of cash flow, and the figure I saw was a multiple of 5. That is, the investor I consulted would pay 5 times annual cash flow, or in your case, $1,800,000, for the whole thing. This buttresses my contention that the place was not worth $3,000,000.

If I was the CPA working for you, I would then want to examine the appraisal, look at tghe comparables used, and do what we call 'due diligence' to support a better sense of value. Then, I could advise you how to proceed.

I hope that gives some guidance. Thanks again from Just Answer. I'm PDtax.



PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 2107
Experience: Tax professional and business consultant for 32 years.
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Tax professional and business consultant for 32 years.