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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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Fifteen years ago I started a business and brought in two partners

Customer Question

Fifteen years ago I started a business and brought in two partners and extended 30% each. One of the partners is age 76 and is ready to go. He made an attempt to sell his interest with no takers. Now he is asking me. We are all essentially part-timers. His income over the past 5 years has been 2800 month net before taxes. For just the last few months his take is now averaging 3700. He is asking for 5 years 20% down and ten year payoff. Your advice please. Happy to answer any questions that may help refine your answer.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Hi and welcome to our site!
You described your situation very clearly.
However what is your actual question?
Customer: replied 1 year ago.
What's a fair price to pay for his share?
Expert:  Lev replied 1 year ago.
We need to look from market prospective. If you are a buyer - what would you pay for your business? - that would be the value.
Fair market value (FMV) is the price that the business would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
When the business is not sold - we need to appraise it to determine the FMV.
Common valuation methods for businesses include:
-- Market-based valuation. - based on past experiences selling similar businesses. The broker may recommend an asking price based on the sale prices of similar businesses in the same area or industry. It is quick, inexpensive and it's common practice for the sale of small businesses.
-- Asset-based valuation. - based on the book value and liquidation value of the business. These are considered bare minimums in business appraisals.
-- Earnings-based valuation. - based on historical financial figures, including debt payments, cash flows (past, present and projected) and revenues.
While you perfectly may perform such evaluation on your own - if that will be used fro litigation - it might be better to have that done by the appraiser licensed in your state.
You may also use software solution - this is just an example -
http://freevaluationsonline.com/
However - that will provide only a raw estimate. Just follow the procedure - and you will get a valuation report.
All types of valuations are often combined for a more inclusive appraisal. You may use professional appraisers -
http://www.allbusiness.com/buying-exiting-businesses/selling-a-business-valuations/8171-1.html
There is no easy way to appraise a business - every business is unique and often depends on specific individuals, customers, etc. Valuation methods above are a generic approach in determining the value.
As we are talking about a share in the partnership - and there is no market to sell such interest - the FMV value is usually 10-20% lower than based on business appraisal.
Sorry if you expected a simple answer.
Let me know if any clarification needed.