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QLD Buying Out of Business Partnership after Separation?

Discussion in 'Commercial Law Forum' started by Marnie, 1 November 2014.

  1. Marnie

    Marnie Active Member

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    My husband and I recently went through a separation. I am a 50% partner in our business, which has been running for 15 years and annually turns over around $250,000. He does the physical labour and I take care of the finances. He was recently advised by a solicitor that to buy me out of the business, it would be based on the business assets like plant and equipment etc. This in itself is really not worth very much at all. I was under the impression it was based on a calculation which involved annual turnover. Any advice/thoughts regarding commercial law would be greatly appreciated.
     
  2. Amanda E

    Amanda E Well-Known Member

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    Hi @Marnie,
    Have you received, or going to seek, your own independent legal advice? Let me know. (Remember that his lawyer will want to sway things in your husband's best interests (as he's the lawyer's client, not you).)

    Annual turnover should be included in the calculation - if you were selling to an unrelated party, turnover would be considered in calculating the value of the business. Have a look the CPA Australia Guide to Exiting Your Business and Australian Government "Valuing your business" page.
     
  3. Marnie

    Marnie Active Member

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    Thank you Amanda, no I have not yet sought legal advice. Thank you also for those links which I will check out now.
     
  4. Sarah J

    Sarah J Well-Known Member

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    Hi Marnie,

    I agree with Amanda, the cost should be based on the value of the business. This is best calculated by referring to market value. If you were to sell the business, what would it's value be? This would include annual turnover, business growth potential, any other interests (e.g. lease interests) the business owns. Your share would therefore be 50% of that value. Again, it is up to you whether you would like to sell or continue in the business.

    Further, is this a company or a partnership? You should have a look at the partnership agreement or company constitution for any obligations/duties of the partners in the event of separation.
     
  5. Marnie

    Marnie Active Member

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    Thank you Sarah. I'm not sure what the value is as we started the business (it is not a company) together. I believe the business growth potential to be high as turnover has increased significantly over 15 years. Once I am bought out, my husband will continue to run the business as his own and employ a book keeper/accountant for the financial side of things. I don't have a choice as to whether I stay a partner or not as he would like to buy me out along with all of our other financial commitments, due to our separation. Unfortunately I now find my self unemployed with his income potential as the sole business owner to be very high.
     
  6. Amanda E

    Amanda E Well-Known Member

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    Hi Marnie,
    Since you look after the financials, you should be able to go over the most recent, and past years' revenue, costs and profits.
    So you don't have a partnership agreement in place?

    Separately, you'll need to organise property settlement and your divorce application. See these Family Law Courts pages:
    If you can't agree on property and money (which includes money, and assets like your home and superannuation), then you have to apply to the court to decide - See the "Family Law Principles - Financial cases" page for the factors that the court takes into consideration.
     
  7. Marnie

    Marnie Active Member

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    Hi Amanda, yes I take care of all the financial reporting and just lodge everything at the end of the financial year with an accountant. We do not have a partnership agreement in place and I had actually never thought of this to be honest. Thanks for those links (will look into them). In terms of a settlement on property and other assets I think we are close to an agreement (although I will seek legal advice when it is to be finalised). I'm more concerned as to what value I should place on the business partnership when he buys me out. He has no idea as to what he should offer me and neither do I.
     
  8. Rod

    Rod Well-Known Member

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    If you are making profits, then the business is certainly worth more than just the book value of the balance sheet.

    Businesses can be valued in a number of different ways but at the end of the day a business is only worth what someone else is willing to pay.

    I prefer to look at ROI valuation models (how quickly can you get your money back) and the period I use depends on business risk, stability of business and business income, effort getting new sales, effort on getting repeat sales, owner's personal involvement in getting new sales/retaining existing customers, etc. For small businesses under $1M revenue, I'd be looking at anywhere from 6 months to 2 years profits as a value. 'Profit' is loose term and various expense items in small businesses, such as car leases and wages and superannuation and rent and others, may need to be removed/discounted to obtain a picture of real underlying profit to a prospective purchaser. Often a purchaser's own existing businesses will impact on their perceived value of your business.

    Can be tricky valuing small businesses and is more an art than a science.
     
  9. Marnie

    Marnie Active Member

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    Thanks

    Thanks Rod, that was extremely helpful and I'm not sure why my reply is coming up under your post. Sorry !

    The business is literally 100% repeat customers plus consistent new business. There are no sales or marketing initiatives in place for the business, it simply does not need it and is one of only two that offer this service in the area. The only negative is that it is weather based and we live in the tropics so you have to factor this in and be accountable for your spending in the wet season.

    I'm pleased to hear some sort of guide being 6 months to 2 years to establish profits into value. What I was hoping to achieve was around the 1 year mark (actually a bit less) but that puts it into perspective if you also take into other items like you said, car lease, rent etc.

    Many thanks again
     
  10. DennisD

    DennisD Well-Known Member

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    Hi Marnie

    " He was recently advised by a solicitor that to buy me out of the business it would be based on the business assets like plant and equipment etc. "

    Haha, come on get real! Yes, it will be based on these things, as well as other important things

    We may not be financiers, but it is common business knowledge that there are a number of ways to come to a business valuation which as Rod says is more of an art than a science in some cases and especially with small businesses with lots of goodwill (eg, customer lists with lots of repeat business). A valuation based on physical assets, plant and equipment, only will come in at the lower/lowest end of the valuation spectrum, and my understanding would deviate from commercial standard business valuation techniques

    What is the business worth in terms of earnings multiples? I don't know. But I would take any advice from his lawyer with perhaps a grain of salt, and heed the opinions of your own advisers
     

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