How to evaluate value an LLC for buy-out?
July 14, 2013 11:45 AM Subscribe
Hi - my partner decided to leave our LLC and now we need to evaluate how much is it worth.
It's a spa business with two of us performing most of the services in a rented location. Lease agreement is up in October 2013. Each of us serviced our own clients - she's got her Clients. I got mine clients.
Any suggestions or rules of thumb approaches for how to estimate our service business value so we can arrive at a fair buy-out price?
Appreciate all the help!
Oh, and you may find this page at Inc.com helpful.
The info I was starting to get into above is well-suited to a fairly strict application of the "discretionary cash flow" method, and from what I understand it's preferred for small business valuation, though we didn't cover small businesses as much as I'd have liked, in my finance/accounting classes. I know - from having known actual small-business owners - that the biggest risk as far as screwing up pretty much any budget or other large-scale monetary calcuation is almost certainly those here-and-there expenses no one's been writing down. How long has the business been open, BTW? If it's been more than two or three years, the word "depreciation" comes to mind.
Really, I'm starting to think that my first line about needing a professional is really where I should have stopped.
posted by SMPA at 12:18 PM on July 14, 2013
The info I was starting to get into above is well-suited to a fairly strict application of the "discretionary cash flow" method, and from what I understand it's preferred for small business valuation, though we didn't cover small businesses as much as I'd have liked, in my finance/accounting classes. I know - from having known actual small-business owners - that the biggest risk as far as screwing up pretty much any budget or other large-scale monetary calcuation is almost certainly those here-and-there expenses no one's been writing down. How long has the business been open, BTW? If it's been more than two or three years, the word "depreciation" comes to mind.
Really, I'm starting to think that my first line about needing a professional is really where I should have stopped.
posted by SMPA at 12:18 PM on July 14, 2013
Because this is only a two-person operation, I'm not sure that most traditional business valuation methods would apply. I'm also assuming here that you are both 50/50 partners and did similar work to get this place up and running.
It would be unfair to you to look at the historical cashflows of the business and apply any kind of multiple on that, since the loss of this partner (and presumably their clients) would not make the new business comparable to the old business. To recreate the old business, you would need to hire an employee and rebuild the client list, and any goodwill that process generates (if successful) and the risks/costs of doing so (if unsuccessful) should inure to your benefit solely.
Thus, you could assert that the value of the business is simply the current net tangible value of any assets in the business (likely similar to cash in the bank for a small service business with no debt).
Presumably your partner will be taking a large portion of their clients with them when they leave (doubtful that there is any kind of non-compete or non-solicit clauses in your existing business agreements), so you could assert that this alone would be proper compensation for their exit.
A key variable I am missing is how many walk-in clients the business receives typically. The more walk-ins, the stronger a counter-argument could be made that there is real goodwill in the brand and location beyond the clientlist.
posted by jameslavelle3 at 1:45 PM on July 14, 2013 [2 favorites]
It would be unfair to you to look at the historical cashflows of the business and apply any kind of multiple on that, since the loss of this partner (and presumably their clients) would not make the new business comparable to the old business. To recreate the old business, you would need to hire an employee and rebuild the client list, and any goodwill that process generates (if successful) and the risks/costs of doing so (if unsuccessful) should inure to your benefit solely.
Thus, you could assert that the value of the business is simply the current net tangible value of any assets in the business (likely similar to cash in the bank for a small service business with no debt).
Presumably your partner will be taking a large portion of their clients with them when they leave (doubtful that there is any kind of non-compete or non-solicit clauses in your existing business agreements), so you could assert that this alone would be proper compensation for their exit.
A key variable I am missing is how many walk-in clients the business receives typically. The more walk-ins, the stronger a counter-argument could be made that there is real goodwill in the brand and location beyond the clientlist.
posted by jameslavelle3 at 1:45 PM on July 14, 2013 [2 favorites]
As people have said, this could get complicated and therefore relatively costly. It might be best if you can both come to an agreement you both feel good about on your own.
To that end, the value of the business is going to be determined by the difference between assets and liabilities.
Liabilities are probably pretty straightforward, what debts and other commitments does the business have. What are the recurring expenses, like rent, utilities, supplies, taxes, maintenance, cleaning, etc?
Assets are more complicated. It should be fairly easy to inventory and estimate a value on any physical assets (subject to depreciation). The rest of the value is going to be wrapped up in the revenue the business generates. The bulk of that is almost certainly embodied in your respective client lists. The rest is going to be in new business generated by the reputation of the spa itself. I'd think you could measure that by looking at the revenue from new customers who either walked-in or made an appointment without asking for one of you specifically. You might also add any clients you pick up from your old partner if they find her new location less convenient.
At least that's how I'd look at it.
posted by Good Brain at 1:47 PM on July 14, 2013
To that end, the value of the business is going to be determined by the difference between assets and liabilities.
Liabilities are probably pretty straightforward, what debts and other commitments does the business have. What are the recurring expenses, like rent, utilities, supplies, taxes, maintenance, cleaning, etc?
Assets are more complicated. It should be fairly easy to inventory and estimate a value on any physical assets (subject to depreciation). The rest of the value is going to be wrapped up in the revenue the business generates. The bulk of that is almost certainly embodied in your respective client lists. The rest is going to be in new business generated by the reputation of the spa itself. I'd think you could measure that by looking at the revenue from new customers who either walked-in or made an appointment without asking for one of you specifically. You might also add any clients you pick up from your old partner if they find her new location less convenient.
At least that's how I'd look at it.
posted by Good Brain at 1:47 PM on July 14, 2013
I think a very important metric is who keeps the clients? Is she taking her clients with her, or are they staying with your store? If you both brought your own clients in and both are taking your clients with you, then the business wasn't much more than a space sharing agreement. The value of the business is really only the value of the new business that was created while you were in operation.
posted by gjc at 1:54 PM on July 14, 2013 [2 favorites]
posted by gjc at 1:54 PM on July 14, 2013 [2 favorites]
What kind of licenses or registrations were involved? Business, hygiene, sterile processing (if this were the type that involved manicure/pedicure type stuff), etc.?
Will one of you get to keep the current business name and therefore only pay renewal fees for permits instead of registering as a new business (and possibly having to take mandatory courses)?
Anything not under your own name will have to be changed or replaced and the costs could add up, not to mention that the lead time for such paperwork/permits/inspections to go through could mean lost business if you don't get things in motion well ahead of when the business is divided.
posted by variella at 2:18 PM on July 14, 2013
Will one of you get to keep the current business name and therefore only pay renewal fees for permits instead of registering as a new business (and possibly having to take mandatory courses)?
Anything not under your own name will have to be changed or replaced and the costs could add up, not to mention that the lead time for such paperwork/permits/inspections to go through could mean lost business if you don't get things in motion well ahead of when the business is divided.
posted by variella at 2:18 PM on July 14, 2013
You say only that your partner is leaving, not where she is going or what she will be doing. That is going to be the key question. If she is going to continue to do that work, you can assume that she will keep her clients and you should not expect to pay her for that goodwill. If she is going to join the Army and you will continue with all clients, the calculation is much different.
posted by yclipse at 3:25 PM on July 14, 2013
posted by yclipse at 3:25 PM on July 14, 2013
At first blush I don't see what there is to buy out. Split the furniture/equipment evenly and go your separate ways.
Are you planning on remaining in the same location? Or will you move to something smaller and less expensive, if so, really, she's entitled to nothing, since what of value of hers will you retain?
You for sure should hire a pro to help with this and formalize with an attorney.
But based one what you're describing, if she's getting out of the business altogether...eh.
posted by Ruthless Bunny at 6:41 AM on July 15, 2013
Are you planning on remaining in the same location? Or will you move to something smaller and less expensive, if so, really, she's entitled to nothing, since what of value of hers will you retain?
You for sure should hire a pro to help with this and formalize with an attorney.
But based one what you're describing, if she's getting out of the business altogether...eh.
posted by Ruthless Bunny at 6:41 AM on July 15, 2013
Figure out your yearly profit after expenses, then multiply that by a factor of between 3 and 7. That's your value.
posted by blue_beetle at 7:21 AM on July 15, 2013
posted by blue_beetle at 7:21 AM on July 15, 2013
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Before you go to them (or an accountant,) first get together dollar figures from your checking account, etc. Yes, your monthly gross from sales, but also expenses - how much did you spend on advertising, on paying someone to build the website, on business licenses, etc., at the beginning, as well as over time? Make sure to include any deposits, insurance payments, etc., not just the easy-to-spot number on the check you sent to the landlord each month. Definitely remember all your utilities, including pesky things that only require payments annually or even less often (like DNS renewals.) Take into account that some of your expenses grow each year or are actually a percentage of another expense (taxation is a big one, as are professional services including the dude who prepares your taxes.)
It's going to be a lot trickier if you bought equipment together that only one person can keep (like a cash register). I sincerely hope you guys haven't been doing the "oh, we need toilet paper for the salon, I'll go buy some with my personal credit card" thing all this time.
Be taking notes now so you can bake in some "exit" procedures for the next business arrangement you set up.
posted by SMPA at 12:03 PM on July 14, 2013