Selling a business-Need your opinion.....

[BusiBusi]

Business hypothetical question, since there is not a textbook answer- your opinion is very valuable to me.

Question: A small business is being bought by a large corporation for a significant sum.

There are 4 owners. With varied status. Which are:
a.)20 years
b.)17 years
c.)10 years
d.)2.8 years, 1/5 of ownership purchase completed.

Person d. feels that they are fully entitled to ¼ of the purchase of the business.
Persons a.-c. feel it should be an amount that is some fraction less than the full ¼.



How would you divide the buyout money?

For example:
The business is sold for $1,000,000. (Or 10,000,000, etc.)

Should person d. get $250,000?

Or 80% of $250,000
or 75%
50%
30%
etc.


Realizing that there are many other subjective variables in partnerships, I have left this question VERY plain. Be frank.

Anyone have an opinion?
Or any information on where I could research precedents for this situation?


Thanks for any advice.
Busi

[Wozcreative]

I think all people should, despite the number of years worked, come up with a proposal as to what they have contributed to the company. This can be hours spent (overtime, or holidays), money spent, resources, types of jobs done etc. Then collectively the numbers should be agreed upon.

[vangogh]

That seems fair to me too. We don't know the details, of course, but based solely on the time spent I would guess partner D has contributed the least. Granted we only have the time data. It's possible that D has contributed more than everyone else combined even in a shorter time.

Since person D has only complete 20% of their ownership how is everything divided? Does person D only own 5% of the business or is person D's share generally considered to be 25%? Another question to ask is if the company had acquired a large debt would person D be held responsible for 25% of that debt or some fraction of 25%? If you would ask person D to pay 25% of the company debt then it only seems fair to give person D 25% of the buyout money.

[huggytree]

we dont know how much money any of the partners contributed?

how many hours over the years?

maybe the 10 year guy has put more actual hours into the business than the 20 year guy??/

my gut tells me to go by hours and put in some sweetners if they also contributed more $ or less $ than the other 3

tell guy D to take a hike...no logical person would think he'd get 1/4 of the business with 10% of the time invested


Guy A-35%
Guy B- 30%
Guy C-20%
Guy D-15%

thats where it should most likely start....and that may be being generous to guy D

[Freelancier]

Silly question: why is there no partnership agreement laying out each partner's share of the business and what happens in the event of a dissolution or sale of the company?

Just because partner (d) came in last doesn't mean that they didn't make the greatest contribution being valued by the corporation buying your company. For example, some companies bring on board people with contacts to VCs so that they can get bought. That expertise is what got them bought, so that expertise should be valued quite highly.

[ClientSpotDave]

I'll argue both sides:

1. If I'm D, and was told "you'll be a full 1/4th owner, and you can vest/pay us 1/10 of the buyin every year until you're there". Most buyouts trigger automatic vesting for owners/shareholders, so where his equity vesting is doesn't matter, only what he was told his stake would be (e.g. 25%).
So I'd go for the 25% in that case.

2. If I'm A-C, and feel like we've put in a lot more time and energy than D, I don't want D to get an equal share. But of course, even A-C have different amounts put in over time. And maybe A has been around for 20 years, but pretty much doing nothing for the last 10. Too many variables to figure out, so I probably retreat to simple vesting. If D is only 1/5 vested, then I only give him 1/5 of his equal (25%) share. With the rest of the money (4/5 of 25%), I then allocate that to the remaining partners on top of their 25% base, effectively by years of service.

Example (for #2):

Total years service for all owners ~= 50.
Buyout amount = $1MM
Base Vested Amount for A-C = 25% x buyout = $250K
Vested share for D = 1/5 of 25% x buyout = $50K, with $200K to redistribute

1. A (20 yrs) = 250K + (20/50 x D's unvested share) = 250K + 80K = 330K
2. B (17 yrs) = 250K + (17/50 x D's unvested share) = 250K + 68K = 318K
3. C (10 yrs) = 250K + (10/50 x D's unvested share) = 250K + 40K = 290K
4. D (2.8 yrs)= 50K + (3/50 x D's unvested share) = 50K + 12K = 62K

So we've given D back a little something from the pool of unvested shares, but this is a better reflection of time invested for the 4 owners.

[huggytree]

in the end it will be a typical partnership ending.....no one will be happy and all of you will think the others got too much

we havent been given enough info to get into what partner brought the most to the table....all we have is years of service

[BusiBusi]

There are some real thinkers here, since you've generated as many questions as answers.

Apology for not emphasizing this more...
"Realizing that there are many other subjective variables in partnerships, I have left this question VERY plain." We don't want to kill ourselves with the subjective valuation of every last thing A-D has contributed. Their work ids quite similar. (I didn't want to waste the forum's time with that either.
I probably should have bolded that.

The partners have decided not to get into the highly subject hair-splitting drama of who's work is worth more than the others. Suffice it to say, their work is very similar and production-like, and to be generous say person D
has been maybe 10% more productive in his 2.8 years. A-C have been through the the fire together. A-C consider themselves fully vested 1:1:1. D is getting his/her managerial feet wet now.
This is unexpected and unprecedented. There is no contracting for this situation. And frankly, A-C do not have to give D a dime, since he/she is not done his/her purchase. They, A-C, wish to be fair but have no basis to gauge what that is.


You thoughts have been helpful. If anyone has anymore to spare that would be fantastic.

Sincerely,
Busi

[ArcSine]

Ideally, the value of the business, as monetized by the sale, would be mapped as a function of time, with each owner sharing in the gain in proportion to how much value accrued during his or her ownership.

Simplistic example: Suppose I've owned a share of ABC Corp for the last 5 years, during which time it has remained flat at $10 per share, exactly what I paid for it. You came along last month and bought one share, also for $10. But things really started popping subsequent to your share purchase: the company landed new contracts, expanded into a new high-potential growth market, CEO of the main competitor was YouTube'd in an embarrassing situation with his secretary..., and so during the last month the stock price has jumped to $17.

It matters not that I've been a part owner of this company for the last 5 years and one month, while you've only been on board for a month. The $7 per share gain accrues to your share and to mine equally.

The point is that ideally, if you had markers of any kind which would at least hint at how the value of the biz has evolved over time, then you'd have a basis for approximating how much value gains have occurred during the different ownership periods of time.

That might not be quite as idealistic as it first sounds, since in many cases involving admission of new partners to an existing partnership, some attempt is made with each new admission to estimate a rough value of the existing biz at each such time. Was anything like this done in this case, or do you have any other markers you could look to (such as previous buyout offers) which would give some implication of the company's value at different earlier points in time?

Absent that, maybe there's some particular metric which the partners agree is the best indicator of the company's value. It might be the number of customers, the average annual revenues; the best metric(s) will depend on the situation. But if so, then perhaps you could look at this metric's historical stats to estimate how the value of the business has evolved over time. From there, this value could then be allocated to the partners as a function of associating specific increases in value from Time A to Time B, to the partners who were running the show during the interval A to B.

Just some thoughts. I know I'm preaching to the choir when I say that, absent a well-defined valuation provision in the partnership agreement, in place from day one, matters of this nature become very subjective. Best of luck with it!

[BusiBusi]

I resonate with your response as it seeks to find objective measures. Quantifiable metric to use. Because, as huggytree stated, with the subjective nature of these situations "no one will be happy, everyone will feel shorted..."

Since the business is more of a unit-production style, with most contributions being equal, we just wanted to know what sounded fair. The major contribution, as stated by A and B has been from C(the 10 year guy) who spent years on IT upgrades allowing A and B to not be too burdened by the cross-profession mess. Thus they feel , as stated by A and B, that A=B=C as far as vesting goes.


thnaks