When the time comes to split up a partnership, typically one partner will buy out the other partner. Calculating the cost to purchase a partner's share of a business is second only to starting a business in the number of headaches caused by the negotiations. Having the terms of a buyout specified in the original partnership agreement makes the process go more smoothly, as does having adequate documentation of any investments in the company made by the partners.
1. Obtain a business appraisal to determine how much the business is worth. If the company is publicly traded, you can calculate the cost of the buyout by adding the value of the partner’s entire share. Hire a qualified business appraiser to determine the value of privately owned companies.
2. Calculate percentage of ownership by looking back at the original investment of the partners if you did not specify ownership in the partnership agreement. Hire a mediator to assist with determining percentages if you and your partner(s) cannot agree.
3. Multiply the percentage of ownership by the appraised value of the business to determine the amount necessary to buy your partner's share. For example, if your partner owns 25 percent of a business that appraised for $1 million, the value of your partner's share is $250,000.
- Typically, you can negotiate a lower price for your partner's share if he wants out of the partnership and you can offer a lump-sum payment when you buy out his percentage.
- Depending on your partner's expertise, his share might be worth more than the assigned monetary value. If your partner developed most of the company's business contacts and customers, he may want more for his share than the market value of the business.
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