Business partnerships are formed for many reasons, and many people find decades of success with the right partner. Sooner or later, nearly all partnerships come to an end. In many cases, a major life event, such as retirement, a change in health, divorce, etc. or conflicting viewpoints between partners may prompt a dissolution.
Ideally, during the company’s founding, a dissolution procedure would have been outlined in the partnership agreement, but this isn’t always the case. Dissolving a partnership can be complicated, either with or without an agreement. It may become even more complicated if the parties are driven by emotion. For example, one partner may feel guilt for leaving while the other feels anger or abandonment. Allowing emotion to guide this process is a sure way to end up with a dissatisfied arrangement when one partner leaves a business.
Many courts require an independent business valuation from a certified specialist due to the tendency for emotions to arise during a partnership dissolution. The specialist serves as an impartial party that is committed to valuing the business fairly, independent of both parties. Once a fair valuation has been completed, the parties have a neutral starting point upon which they may begin negotiations to allow one partner to buy out one or more of the others.
A fair business valuation assists the remaining partners to determine whether staying is a sensible option. It also increases the likelihood the departing partner will receive fair compensation for their contributions to the business’s success until their exit.
Business valuations involve complex formulas that analyze several variables, such as anticipated profits, profitability ratios, discount rates, control premiums, and marketability. During the dissolution of a partnership, the business valuation expert may also consider how essential each partner’s expertise or industry contacts are to the business’s overall success. These factors may impact how profitable the business may be once a partner has left.
With a business valuation in hand, the partners may determine their options to proceed while terminating the partnership. In some instances, a buyout isn’t necessary. If the partnership agreement allows for the partnership’s dissolution, both parties can part ways without any further actions.
If one party wants to continue operations while the other does not, it may still be possible to do so, even without a buyout. The partnership agreement’s weighting could be amended to allow one party to assume a majority share in the decisions, finances, and liabilities of the business without having to buy out all of the other partner’s equity. While this may be a possibility in some instances, the exiting partner will often refuse to take a minority stake in the business. Consequently, a buyout is necessary for the partnership to end.
Moving forward with a buyout to dissolve a partnership may require expert legal assistance. Certified experts can help facilitate negotiations for the terms of the buyout. Additionally, the partner wishing to continue the business may have to research and determine the best way to fund the buyout if he or she does not have enough liquid capital to settle with the exiting partner.
Dissolving a partnership can be a long, complicated process and may be incredibly stressful for some or all involved parties. The impact on the livelihood of at least one of the partners may conjure up a plethora of emotions. A professional business valuation is completely impartial to either side during the dissolution of a partnership and serves as tool to the parties to move forward with fair negotiations from a neutral position. Using a valuation to begin negotiations increases the probability that the parties will agree on the terms of the dissolution, reducing much of the stress for both parties.
Shuster & Company, PC is a full-service accounting firm serving clients in the Denver area and around the world. The firm is committed to providing clients with professional, personalized services and guidance to meet a variety of needs, including business valuations that could be used to dissolve a partnership. If you are considering ending a business partnership, contact our experts today to determine how we can help you carry out your dissolution process smoothly.
A full-service Certified Public Accounting Firm located in Denver, Shuster & Company, PC provides quality, personalized financial advice and guidance to individuals, businesses, and the legal community. We offer an extensive range of services, with emphasis in forensic accounting, business valuation, and litigation support.