Michelle 2 months, 3 weeks ago
Business Valuation for Securing a Mortgage vs. for Shareholder Payout
I am currently seeking to sell my share in a business (where all partners are equal share owners). My partners have determined a very low payout by using a business valuation that was conducted for the purpose of securing a loan (the final value was based on the market comparison method, looking at similar business real estate) and are subtracting my share of expenses including roof repairs and taxes. Is this a fair valuation to determine the payout for a shareholder? They are not including assets (equipment, business cars) or cash flow (rental income) that should be covering all the cited expenses. Some of the partners have also taken personal loans and credit from the business, and are using these to offset assets in the business.
Thanks#500890This question came from Business Valuation Calculator: How Much Is Your Business Worth?.1 Reply
Robert Newcomer-DyerModerator2 months, 3 weeks ago
Thank you for your question! Before we begin I will caution that this advice should not be construed as legal advice, and that I am not an attorney. You should always consult an attorney when questions like this arise.
You should know that when buying out a partner in a business, all partners have a fiduciary responsibility to accurately determine the value of the business. The simplest way to accomplish a fair valuation is to engage a professional, either a business valuation expert or an attorney experienced in partner buyouts.
Using a business valuation that was prepared for a mortgage is likely not a fair way to assess the current value of the business. Would you use a valuation of a private residence conducted for the purpose of securing a home equity line of credit as the basis for pricing your home for sale? It’s likely that the valuation is sound for the purposes of securing debt, but a crude tool to use to determine the saleable value of a business.
The scenario you’re describing raises several questions. If your partners are subtracting your share of expenses, but not calculating the value of the business’s assets, it sounds like they are using a blended valuation model and you should question how they are determining what to include and exclude from their “valuation.” Why are liabilities (expenses) being deducted, if assets aren’t being included? Were these values included in the original evaluation?
I’m unclear what you mean by partners have taken loans and are using this to offset assets in the business. Do you mean that they are counting their personal debt against the asset and arguing that the asset has no value to you? You might be entitled to either a percentage of the asset value, or a percentage of the outstanding debt (as this is “income” that the business will recoup over time), but not both, which would be double-dipping. The asset and debt should not cancel each other out, as it is a debt owed to the business, not a debt the business owes.
Ultimately, you and your partners need to engage the services of a professional business valuation expert, or attorney with experience in the subject. If your business partners are not willing to use a professional valuation expert or work with an attorney, you could argue they are not acting in the best interest of the business, which leaves the business open to a future lawsuit (from you) for unfair dealing.
Thanks again for your question, and good luck!