llc, partnership, finance, valuationConsider a 50/50 partnership. One partner wishes to leave on their own accord. The business has debt ($2,500), cash on hand ($500), and inventory ($7000, wholesale value).
Is it as simple as (credits - debits) / 2 is the “buyout” amount?
That would be: (7,500 - 2,500) / 2 = 2,500
I wasn’t sure if we should include inventory since it represents “future value”.
Edit: There is an agreement but the “dissolution” part was marked as TBD (oops). There is some small amount of reimbursement due to the departing party. They seem to expect to be paid for their effort even though the company is not yet profitable.
First, read my answer here: https://startups.stackexchange.com/a/10896/9022
Is it as simple as (credits - debits) / 2 is the “buyout” amount?
No. You can’t determine the market value of equity from a balance sheet alone. In fact, there is no reliable, scientific way to determine the market value of equity.
They seem to expect to be paid for their effort even though the company is not yet profitable.
As well they should. This person worked for the company and that has value. People call this “sweat equity.” It can be very valuable if a company eventually becomes successful.
No one here is going to give you a perfect buy-out formula. Every circumstance is different and everyone values their time differently. You can use your balance sheet as a starting point, but after that it’s a very subjective process. If you want to keep this business, you need to negotiate a buy-out and sign a contract with the partner that covers their time, their equity, and any other possible contribution to the company.
Depending on how aggressive your partner is to get a big buy-out and how aggressive you are to maintain this business, it might be better to liquidate the inventory, pay off the debt, dissolve the company, and distribute any remaining funds (if any) or debt 50/50. If you go this route, you can probably start over clean after a while (ask an attorney how long).
As I’m sure you realize, next time make sure you have clear buy-out and dissolution provisions.
Both invested $200 (100 per person), LLC loaned $2500, did some value adding activities which estimate to $7000 in the future, having still $500 in cash on hand (thus spent $2200 in monetary cost).
Selling those $7000 is a job which is yet to be done.
Company is liable for the loan, and leaving person passes his possible liabilities to remaining one. Depending on country and legislation, partner / founder may be personally liable for repaying loans - please figure it out.
For negotiation: $100 share buyback, and half of $500 in cash. Thus in total $350 to start with.
$7000 added value is not realized yet, thus departing before sales are completed leaves both with estimation on how well business will go. You should not calculate it “directly” as you did, there should be agreement how much each invested (in non-monetary value - time, effort, sleepless nights etc) in generation of those assumed $7K and how much is yet to be invested by party which remains in business. This depends on how well you can bargain, and your relationship with the partner.
There’s a science behind valuations, but there’re human relationships. I hope I gave you some food for thought because there’s no right answer to your question. There’s a possibility that he will depart and both will be satisfied, or you will have to bring case to trial if he will demand too much (in your opinion relating to continue business) and block company operation, or even close the business through bankruptcy.
If someone leaves a partnership, they leave. On those numbers, you really don’t have more than petty cash in the business, and if you have cash personally, surely you would like to invest it in the continuing business, not pay it to the leaver?
Realistically, there’s a negotiation. As things stand, let’s guess that a fire sale of the inventory would yield half its book value. Which leaves you solvent, but only just.
If your partner is reasonably amiable, I might propose a deal based on future sales of inventory. Maybe it goes, one third is “his”, one third is “yours” and the remaining third is matching the loan less cash on hand. Until the initial inventory is sold, each quarter you pay him a third of the actual gross sales. (If you’re adding value, you need to tweak the formula.)
Otherwise, I might propose that we hire a lawyer who will do one job. We are both allowed to give her a sealed bid in an envelope. In a month, she opens the bids. She sets the price at the lesser of high bid and low bid plus $100. She asks high bidder to pay that amount via her, to be paid within three months. When the funds arrive, high bidder becomes the owner and we’re done. If the money doesn’t materialise in time but the business is solvent, low bidder now owns the business without any payment becoming due.
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