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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22772
Experience:  Taxes, Immigration, Labor Relations
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Hi. I am in a 2 person LLC. My partner wants to leave. How

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Hi. I am in a 2 person LLC. My partner wants to leave. How do you determine the value of the company for the buyout? We always got paid each year via Guaranteed Payments (which totaled about $135,000 per year, split 50/50). He is asking for 2.5 years worth of what his profits would be if thing stayed the same for the future ($67,500 x 2.5). Is that fair? I have NO idea. Thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to our site!



There are many ways to value a business and there's no "right" way - the valuation is based on agreement between a buyer and a seller.


You can start with valuation of the business's assets. List all assets, equipment, inventory, etc.
They business may be valued based as a multiple of their revenue. The multiple depends on the industry - normally 1-4 times.
Another way - and seems as you are using it - to value the business as a multiple of the profit. However I woudl exclude actual working hours. For instance if your partner worked 1000 hours per hear and normal rate for such services is $25 per hour - that gives $25,000 - the actual profit is $67,500 - $25,000 = $42,500.


Customer:

We have been partners for 10 years and have always split profits 50/50. We receive guaranteed payments each month and if any money is left over at the end of the year, we split that too 50/50 (after accounting is done). Our business is a tour operation of which I run the field operations and he handles the administrative side. Just trying to figure out a FAIR buyout of his half the business.

Customer:

I actually put in far more hours than he does. I am also away from my family for 4 months a year to run the ops, while he sits home with wife and kids.

Lev :

Then - we may use long-term Treasury bill rate - http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=longtermrate
Assuming 3.5% fro simplicity. $42,500 /3.5% = $1,214,285 This evaluation technique actually puts an upper limit on your valuation - means the business may not worth more than that.


Customer:

This all sounds Greek to me :-) How do I know if what his figure is is actually right? Where does the 2.5 years x his half of the profits come from? Is that standard? Or

Customer:

?

Lev :

There are some commonly accepted valuation method for different industries but there is no standard.
See last page in this publication - http://www.collin.edu/sbdc/docs/Business-Valuation-Methods.pdf
In general - using 2.5 times of his half of the profits looks fair - if you do not want to go into details.

Customer:

Ok thank you.

Customer:

I was hoping it wasn't that much. Our industry is very shaky right now.

Lev :

Sorry but there is no definite way to value the business. You may try to value it using different methods - but that is only for yourself - because the value is based on agreement between partners.
Also - because your partner woudl not be able to sell his share on the open market and you actually the only buyer - the selling price might be 10%-25% less than the valuation.

Customer:

That's comforting. I may try that approach.

Lev :

But if you want to get more detailed valuation - there is no other way but to go into details.

Customer:

What are these "details"?

Lev :

This publication provides a brief descriptions of several valuation methods - http://www.collin.edu/sbdc/docs/Business-Valuation-Methods.pdf

Lev :

I suggest to value the business as a whole - and then divide it between partners.

Customer:

Ok, thanks! You've been a help. I appreciate it.

Lev :

Sorry that I am not able to provide a definite answer. Let me know if you need any help with reporting of that sale.
Please be aware that your partner will recognize a taxable gain on that sale and you will establish a new basis in that business.

Customer:

Ok, thanks.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22772
Experience: Taxes, Immigration, Labor Relations
Lev and 9 other Tax Specialists are ready to help you
Expert:  Lev replied 1 year ago.
I just run into this post which provide an example of the business valuation of tour operators - which might be very helpful in your situation.
I am sorry that might be a little more complicated - but if you want to have a fair valuation - we need to go into details.
Please take a look at this article - https://www.valuadder.com/blog/2012/03/14/business-valuation-of-tour-operators/
and let me know if you need any help with calculations.

As we see this author is using Business value to SDCF factor 2.280
You are using 2.5
He is using three methods and then calculate average of three.

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