I was recently approached with a question regarding the value of someone’s business and whether I did valuations or knew someone who did. It seemed that a business divorce was occurring and that one partner wanted to be bought out. While I was not provided with this information, my guess is that the partners could not agree on the amount needed for the buyout and therefore one partner wanted an independent valuation in order to determine a reasonable buyout amount.
Now, I do not perform valuations myself, nor have the slightest idea how to do one, but I am aware of how much one costs. A good valuation can range in price from at least $3,000, reaching up to $35,000, depending on the comprehensiveness of the valuation, normally as a result of the reasons behind it. In the situation described above, the valuation could cost anywhere from $3,000 to $10,000.
For many small businesses, especially small businesses that might be going through a divorce because of lack of revenue, the price of a valuation is cost prohibitive. Unfortunately, this leaves many business owners right back where they started, arguing over the cost of the buyout, arguing over the little things that got them to the current situation, and possibly paying more for lawyers than the actual value of the company, all while this fighting is hurting what little value is left in the company.
This is a vicious cycle that happens to many businesses and business owners, but there is a way to avoid this situation. By drafting documents during the formation of the business, business owners can plot out the “what ifs” that may occur during the course of the business. These documents can address what happens during a business divorce, including when a valuation of the business occurs, how often it is supposed to occur, and who bears the cost of the valuation.
So what would have occurred in the above example had the business partners obtained documents which dealt with a business divorce? Most likely, a valuation would have occurred regularly which would have given a ballpark estimate of the value of the company. This would allow the business partners to craft a reasonable buyout price, allowing the one partner to either accept or refuse the offer. The business owners would then have been able to divide the company in the most amicable way possible, allowing each to walk away content and allowing the business to continue running.
However, by not having these documents in place initially, the business owners are unable to avoid the large amount of legal fees they are both incurring as well as the possibility of lessening the value of the company. In this case, the resulting buyout is nothing more than a Pyrrhic victory for both parties.
While paying up front to have these documents drafted doesn’t always appear to be the most cost effective choice, it is the most prudent one.
To have your documents reviewed for your Montgomery County, Delaware County or Philadelphia County business, contact us.