Engagement Review: Valuation for Partnership Dispute

Recently, Exit Strategies was engaged to perform a business valuation to resolve a dispute between partners in an Environmental Consulting Firm.

There were four equal partners (LLC members in this case). The firm’s business model had evolved over the years in response to changing market conditions, and the owners’ objective was to have one of the partners leave the firm and have the remaining partners acquire the equity of the departing partner. The company did not have a written buy-sell agreement that defined valuation in the event of a buyout. The parties were at an impasse as to the value of the 25% interest. Tensions were high and business performance was beginning to suffer.

Exit Strategies was called in by the company’s law firm to perform an independent business valuation for the buy-sell. We were asked to determine the fair market value of the subject interest and present our conclusion to the partners in an objective, clear and convincing manner. We were retained by the company and we asked all shareholders to sign our engagement letter.

With our valuation in hand, which clearly laid out the data, assumptions, material factors, approaches, methods and calculations that led to our conclusion of value, the feuding partners were able to quickly resolve their differences, culminating in an agreement between the parties and an amicable buyout.

Exit Strategies regularly performs valuations for Buy-Sell transactions between equity holders, using an appropriate level of due diligence, analysis and reporting that gives shareholders the information and confidence they need to make decisions.

Shareholder buyouts (and buy-ins) periodically occur in privately held companies involving multiple shareholders. In our experience, for buy-sell transactions to be successful, all shareholders, whether departing, remaining or incoming, must believe that they are being treated fairly.

Regardless of whether or not a Buy-Sell Agreement exists, a well-documented professional business valuation as of the transaction date is a major step toward keeping personal bias and emotions in check, and enabling the equity holders to reach an amicable agreement. In most instances, valuation is the most important element, and the sooner it is addressed the better for all concerned.

A third party valuation often serves as a great foundation to facilitate an agreement. With a professional business valuation in hand, shareholders are not only more likely to negotiate successful transactions, but also avoid costly, distracting and time consuming disputes that harm the business and personal relationships.