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Tackle
01-31-2014, 10:57 AM
I recently relinquished my responsibilities as a managing partner in a interior remodeling firm. I am still 50/50 partner. My business partner is planning on joining me at the company I am currently working at. We have a verbal agreement with my current employer to buy them out in 3-5 years as they near retirement. The remodeling company experienced a decent 2013, is without debt, and slowly growing. The remodeling company is an award winning firm with a great reputation, strong web site, and is recognized as a mid to higher end remodeler within our community. Our goal is to either sell the remodeling company to one of our current employees or scale it back once we both are involved and working at the new company we plan to purchase. I have a few questions:



+Is there an easy way to place monetary value on the remodeling company?
+What is a fair way to be paid as a silent partner with little involvement in the daily operations of the company?
+Since we are both working towards the same goal on a daily basis (moving into ownership at the new company), should we determine that we both should have the same salary for 2014 and split the 2014 profits of the remodeling business?

TheResourcefulCEO
02-24-2014, 07:32 PM
My business partner is planning on joining me at the company I am currently working at. We have a verbal agreement with my current employer to buy them out in 3-5 years as they near retirement.

Could you please clarify the above? Do you and your current business partner have an agreement to buy out the company you are an employee of? The use of "them" is confusing me. So I will paraphrase what you said and respond to that. If I am wrong, you can correct me and I will adjust my response.

You left your current business partner full management control of the remodeling business, Company A, to go work as an employee of Company B. Company B is run by individuals approaching retirement age. Your business partner at Company A intends to join you at Company B. This intention is in writing. There is no formal job offer or contract from Company B to your partner on the table. The purchase of Company B by you and your partner is verbal. There is no written contract nor is there a written option to purchase.

In addition, Company B and Company A are in different industries or sub-industries so you and your partner do not want to combine the two companies.

Company A is highly recognized but not generating enough income (after expenses) to pay you and your partner enough. And Company B can pay you and your partner plus offer you both more net worth creation after you finally purchase it than Company A can.

Okay, so what I outlined above is the premise under which I shall respond to your questions. But first, I have a few additional concerns for you.

1) You are placing a great deal of weight regarding what you intend to do in the future with Company A on the assumption that you'll be able to buy Company B. As someone who was once in the same situation, you MUST get this purchase intention in writing. A better offer could come along to buy the business. A larger company, a relative of one of the current owners of Company B, a competitor or business partner to the company. Who knows? So many things change in 3 to 5 years. To get it in writing, you could enter into a sales agreement to buy the company now but pay for it over 3 to 5 years. You could structure this as a regular installment sale or buy down the equity over that time period. If you are not at the stage where you can negotiate a buyout of the company today, you can enter into an option agreement or an agreement that gives you or you and your partner the right of first refusal to buy Company B. I HIGHLY recommend you consult with a business acquisition attorney to help you structure an offer, but only AFTER you talk to the Company B owners about cementing some type of arrangement in writing.

2) Regarding selling to an employee or scaling back, I recommend you first determine if you have any employees interested in purchasing Company A and, if so, what that person or persons thinks the company is worth. If your employees are solely interested in remaining employees, you save yourself lots of time wondering. If you have multiple employees who are interested in purchasing the company, you will need to determine if you will sell to one or have the employees band together and purchase the company as a group. This creates a different set of must dos.

3) I recommend that you engage a business valuation firm or individual to value Company A. A reputable firm will provide you with a valuation based on one or an average of a few different valuation methods which may include a book value, asset-based valuation and a valuation based on the projected cash flows in comparison to industry averages. This will help you decide if you want to still "scale back" if no employee wants to buy, or if you want to offer Company A for sale to the general business buying public (customers, competitors, aspiring entrepreneur).

4) For a quick an easy valuation, look at your balance sheet. The value showing as shareholder's equity is your book value. For an asset-based valuation, check with suppliers, equipment providers, etc. to get estimates of the current value of your assets, accounting for wear and tear. Subtract the value of all your liabilities from your asset valuations to determine the asset-based valuation. You can also look at your industry-specific multiples for companies that were sold in 2013. I'm not sure what they are for your industry. It could be owner's cash flow, revenue, net income, EBITDA,... Compare Company A's multiples with those of remodeling industry companies that sold in 2013.

5) What is fair for a silent partner depends on a number of factors. If you are a silent partner, essentially, you are an investor. In many instances, you would only receive the proceeds due an investor. You would not be "paid" per se. However, if you advise your former business partner or consult on occasion, you would be compensated as an advisor or consultant. You could be paid a monthly consulting fee, on an as-used basis or for specific projects. It's really up to what you and your partner think is fair. My question to you is how did you both receive compensation before? Look at what went into the determination of that compensation and subtract from that.

6) Regarding the same goals, see my answers above. What works for you may depend on your previous arrangements and discussions regarding Company A. For example, if you worked in Company A for six months before your partner became an active participant but you both were paid the same amount, then it makes more sense to do the same now. If that was not the case, then splitting everything 50/50 for Company A may only make sense if you will both receive the same salary as you from Company B for 2014 even though your partner is not yet working at Company B. As 50/50 investors, the 50/50 profit split makes sense. Unless otherwise documented in an agreement, profits go to owners in proportion to their ownership percentage. However, salary is for work provided. Usually if you don't work, your salary doesn't get provided!