Country relating to Question: United States
State (if USA): Utah
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Good afternoon. The formula actually shouldn't be drafted like this. A buy out price should be based on the value of the business as a going concern based on the agreement of the parties or third party appraisal. Then, the partner being bought out would receive what that partner would receive under the agreement under a hypothetical sale of the business. Under the provision above, the partner gets that PLUS the partner's capital account. That would be like buying Apple stock for $10 a share and selling it at $25/share and receiving the $25/share plus the $10/share. The capital account simply represents the partner's basis for purposes of determining whether she has any gain on the sale of the interest, but she should get that plus her percentage interest times the value of the company. If the formula is going to be determined as written, then the value of the company needs to be reduced by the partner's capital account first.
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I am seeking help to understand the contract/purchase price as I don't understand the 'legalese'. Can I have a breakdown of how to calculate the price that I would be buying her out at (even if example numbers are used)?
Sure...The best way to do this is by example:
Assumptions: Gross value of company as determined by appraisal or agreement between the two of you (excluding debt and liabilities): $700,000; Book value of assets: $500,000. Liabilities of the company: $300,000. Partner's capital accounts: $200,000. Ownership percentages: 50/50.
Under your formula, the buy out would be: 1) Capital account of partner ($100,000) plus [2) Net Value of company ($700,000 less $300,000 equals $400,000) times 3) Ownership percentage interest (50%)] = $100,000 plus $200,000 = $300,000. What the partner should get is $200,000.
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