Partnership Disputes & Understanding Company Value

Sun Mergers & Acquisitions’ sister company, Sun Business Valuations, conducts business valuations for a wide variety of purposes. These reasons include negotiating a sale, securing financing, settling a legal dispute, and for a shareholder buyout to name a few.

The following will provide insight into two of Sun Business Valuations recent engagements; one involving a partnership dispute and buy-out, and the other involving the Shareholder better understanding the valuation of their company to determine the best time to purse a sale of the company:

Case 1:

Industry:

Media Production Company of videos and commercials used in website marketing

Purpose:

Sun Business Valuations was engaged to perform a business valuation relative to a partnership dispute. There were four equal shareholders and the objective was for three of the shareholders to acquire the shares of the departing shareholder. The challenge; however, was that the parties did not have a buy-sell agreement that defined valuation in the event of a buyout. The parties were at an impasse and could not reach an agreement as to the fair market value of the 25% interest.

Sun Business Valuations was called in by the firm’s CPA to perform a business valuation to be used for the following purposes:

1. Help the shareholders better understand the fair market value of the Company.
2. Present the valuation conclusion to the remaining shareholders to ensure a thorough understanding of its conclusion and justification of the determined opinion of value.

Conclusion of Value:

In this particular case, we were able to bring the feuding shareholders together, culminating in an agreement between the parties and an amicable buyout.

Valuator’s Summary of Engagement:

Shareholder buyouts (as well as shareholders buying in) occur frequently in closely held companies. It is critical that departing, remaining, or incoming shareholders believe they are being treated fairly in a transaction between the parties.

Sun Business Valuations performs many valuations relative to Buy/Sell Agreements between shareholders. In the event a Buy/Sell Agreement does not exist, a well documented professional valuation is critical toward enabling the Shareholders to reach an amicable negotiated agreement.

A third party valuation serves as a great foundation to negotiate and facilitate an agreement that appeases all parties involved in a shareholder transaction. With a professional business valuation, shareholders are more likely to negotiate successful transactions and avoid costly, distracting, and time consuming disputes.

Case 2:

Industry:

Contract Manufacturing Company

Purpose:

Sun Business Valuations was engaged by the Shareholders to perform a business valuation that would enable the founders to better understand their exit strategy options. The Company was a family owned business founded by a husband and wife who had grown the business both organically and through acquisition over a 19 year period. Fortunately, the Shareholders were not in a position that forced a sale (i.e. health or financial challenges). The company was thriving and the Shareholders were considering a sale for in order to relocate and achieve other lifestyle goals.

Valuator’s Summary of Engagement:

When evaluating exit strategy options, it is critical to have a realistic understanding of the fair market value of the company prior to pursuing a business sale transaction. It enables the parties to make an informed decision rather than “shooting from the hip” when considering such a critical decision. It enables the shareholders to use this valuation as a benchmark and approach future negotiations on an informed basis.

Sun Business Valuations based this report on a thorough analysis of the company’s historical financial statements as well as the various operational and intangible factors that impacted valuation. Five alternative valuation methodologies were used in arriving at a valuation conclusion.

Since financial statements are generally tax driven and not prepared for business valuation purposes, Sun analyzed each line item to identify any applicable recasting adjustments to determine the adjusted EBITDA (adjusted earnings before interest, taxes, depreciation and amortization). In doing so, we examined one-time or non-recurring expenses, shareholder fringe benefits, normalized shareholder compensation, non-cash expenses, and various other applicable recasting adjustments. We also made applicable adjustments to the company’s balance sheet.

Numerous intangible and operational factors needed to be assessed in addition to the overall financial health of the business. We analyzed how the company stood up to the dozens of risk factors and value drivers that impact valuation. These include shareholder dependency, quality of the management team, customer concentration, vendor dependency, industry stability, and barriers to entry to name a few.

In this particular case, the subject Company excelled in most of these areas, having put management and processes in place to facilitate efficient operations and lessen dependency on Shareholders. A main issue arose in the area of customer concentration as the company’s largest customer accounted for 54% of the total revenue. This and many other factors were considered in performing our business valuation engagement.

Sun Business Valuations reviewed the valuation with the Principals and their professionals and they are now preparing to pursue a sale of the company from an informed vantage point.

To read more about customer concentration issues CLICK HERE.

For more information on our valuation process or to discuss your particular valuation needs, contact Stephen Goldberg, Managing Partner of Sun Business Valuations, LLC, at 201-727-1300 or @GS.

About Sun Business Valuations

Sun Business Valuations is a preeminent Business Valuation and Appraisal firm serving the needs of Attorneys, Accountants, Financial Planners, Shareholders, and Business Owners for over a quarter century. For more information on Sun’s business valuation division, visit our website at , or contact Stephen Goldberg at 201-727-1300 or @GS.