Business partnerships are much like marriages. Although we don’t (usually) take vows to stay with a commercial partner “until death do us part,” we do expect to be in business together for the long haul. Otherwise, why team up in the first place?
But just as many marriages sadly end in divorce, so do many businesses dissolve. Having helped many clients in this situation, I’ve often shared an old adage: “The only ship that cannot sail is a partnership.” This is because many (if not all) partnerships are susceptible to the dreaded “5 D’s”: divorce, disagreement, disability, distress, and death.
Handling the transition of your company properly can mean the difference between continuing on as strong as ever—or collapsing in failure. Thankfully, a partnership buyout agreement based on an expert business valuation performed by Sofer® Advisors can make all the difference. How? By ensuring a fair and equitable partnership buyout formula.
Buying Out a Business Partner
Before examining why an airtight business valuation plays such a vital role in how to buy out a business partner, it’s important to understand why partnerships dissolve and what causes partners to disagree on valuations.
From amicable splits to the need to pursue different life courses, to extreme cases of one partner neglecting the business, partnerships can end for any number of reasons. Again, much like a marriage. In fact, one of the most successful companies in Silicon Valley serves as an illustrative example of how a once symbiotic partnership can change as the partners themselves change.
Although most of us associate Apple with Steve Jobs, the tech visionary in a black turtleneck holding up his latest culture-shifting iPhone, Apple was a partnership long before it was the most valuable company on earth. Originally, Apple was a partnership between marketing genius Steve Jobs and engineering wizard Steve Wozniak. Together, they revolutionized America’s relationship with electronics by building computers to be placed in every school and even in many homes.
But as Apple found success, Jobs’ personality changed. Wozniak explained to CNBC that as the company gained financial success, “[Jobs] didn’t want to talk about jokes, [or] fun kid things, only business suits on the front of magazines, talking business talk and learning how to speak it.” He elaborated to the Milwaukee Business Journal that, “Some of my very best friends in Apple, the most creative people in Apple who worked on the Macintosh, almost all of them said they would never, ever work for Steve Jobs again. It was that bad.”
Clearly, this was a partnership headed for a major shift—to put it lightly. It’s also important to note neither partner was necessarily in the wrong. Jobs’ focus changed as the business grew. Meanwhile, Wozniak remained the same engineering expert he’d always been.
There was no big meltdown between Jobs and Wozniak, either. Apple quickly transformed into a public company, lessening the chance for the partners to clash in such a way that might have brought Apple down. “The Woz” scaled back work due to medical issues, and Jobs’ board ousted him. This led the latter to spend a decade in exile before returning to the fold.
So, what might have happened if their changing relationship had boiled over? Well, if they pursued a solid business valuation from a firm like Sofer® Advisors, the pair would still have likely settled in an amicable way, allowing the company to continue operations.
How to Buy Out a Business Partner
When it’s time for business partners to part, even in the most positive of circumstances, there can be major differences in what each partner believes the company to be worth. Consider three common sources of disagreement:
- Differing roles: If one partner has heavy involvement in a business, generating sweat equity, they may have a very different concept of the organization and its value than a partner that remains hands-off and/or distant from operations.
- Varying levels of financial literacy: If partners have differing financial expertise or if one is more involved in the books than the other, valuation disagreements can be based on projected revenues, ROI, and other financial factors.
- Profitability and direction: When partners disagree about where the business is going and how it can achieve better financial results, they will likely disagree on valuation. Often, such reasons are behind the breakup in the first place.
How Sofer® Helps with the Partnership Buyout Agreement
Bringing partners together on the value of a business is a crucial step to helping them go their own ways without conflict, an extended legal fight, or anything else that will slow down future endeavors. So how can Sofer® Advisors get (even hostile) partners on the same page one last time? The answer can be found in the meticulous approach we bring to every business valuation.
Through extensive information gathering and an unparalleled commitment to documenting the value of each client’s business in a way that remains both airtight and defensible, Sofer® Advisors presents partners with a valuation both supremely accurate and clear. Our clients not only grok the value of their business based on our presentation, but also why it is valued at a certain level.
This understanding, in turn, empowers partners to create a buyout agreement both fair and equitable to all parties. And for the partner who wishes to remain with the business, keeping that split amicable can make all the difference. Likewise, the partner exiting can do so with their head held high, quite secure in the knowledge their contribution was fairly valued.
If your partnership is coming to an end, whether you plan to stay with the business or to head for greener pastures, it’s best to secure a partner buyout valuation as early as possible to ensure a fair and smooth transition. Sofer® Advisors are ready to help you put your differences with your partners to rest—with ease. To learn just how, contact us today for your free consultation.
David Hern is the founder and chief executive officer of Sofer® Advisors, LLC focusing on business advisory services related to litigation assistance, estate and tax planning, and business enterprise valuations for various privately-held and public companies. He is a qualified financial analyst with a proven ability to simply and clearly communicate analysis to boards of directors, presidents and CEOs, CFOs, controllers and private equity portfolio managers. David has been recognized for enabling organizations to determine their enterprise and equity value for a variety of situations including strategic planning, sale or IPO, mergers and acquisitions, financial reporting (common stock, stock options grants, purchase price allocations, impairment analyses, etc.) and tax compliance (estate & gift, 409A, NUBIG). Industry experience includes, but is not limited to, professional services, business service, healthcare, information technology, financial services, and manufacturing & distribution.