Buying out a partner
Discussion
I want to keep the details brief for personal reasons but for the sake of an accurate reply, let`s say, 2 parties A & B, in a newly formed business project, with a guaranteed income of say £4mil over a 20yr+ term and an asset of est £4mil by the end of the term.
At the end of the term the asset will still be there to sell or hold, but the contract for income would have run it's course and expired.
What would you suggest being a fair amount of money to buy one of the partners out of the project in the early stages? Bear in mind, it`s the party member that has brought everything to the table, except the asset, who has been made an offer to walk away.
It`s not a case of it can`t be replicated elsewhere by party A without party B and I`m not after that advice. It`s just a simple buy out offer based on the fact that Party B wants to reap the income alone in the future as 20yrs + is a long time to be together with a business partner.
Nothing underhanded and no fall-outs, just a fair amount for one to keep the project and the other to walk away.
How would you calculate a fair amount based on the above info? Is there a business formula when valuing a company like this?
At the end of the term the asset will still be there to sell or hold, but the contract for income would have run it's course and expired.
What would you suggest being a fair amount of money to buy one of the partners out of the project in the early stages? Bear in mind, it`s the party member that has brought everything to the table, except the asset, who has been made an offer to walk away.
It`s not a case of it can`t be replicated elsewhere by party A without party B and I`m not after that advice. It`s just a simple buy out offer based on the fact that Party B wants to reap the income alone in the future as 20yrs + is a long time to be together with a business partner.
Nothing underhanded and no fall-outs, just a fair amount for one to keep the project and the other to walk away.
How would you calculate a fair amount based on the above info? Is there a business formula when valuing a company like this?
Mr Overheads said:
Google "Discounted Future Cashflow" - sounds like what you need.
This is a good suggestion. Basically you need to work out how much money the venture will disgorge over its lifetime and convert that back into an equivalent amount of money at today's value. The figure you come up with will give you the maximum value of the company. Clearly you will want to pay less than this number. Then you need to estimate the risk that things don't go to plan and apply a factor accordingly to give you a realistic value. It depends on if the other partner is a willing seller, or not.
Whatever your dcf models says, if you make the an offer and the other partner says no thanks, it will come down to a negotiation
In an extreme example the other partner could have securitised her share of the income already and, therefore, be unable to sell
Whatever your dcf models says, if you make the an offer and the other partner says no thanks, it will come down to a negotiation
In an extreme example the other partner could have securitised her share of the income already and, therefore, be unable to sell
If I were the partner you are looking to buy out, I would initially assess valuation based as follows:
~ 2 million lost income over 20 years. £100k per year.
~ 2 million lost asset value at year 20 + any increase in captain gain
If I had no need to sellout, I would definitely want my half of the asset value, plus at least 50% of lost income over the term. So at £3 million I would consider your offer.
Theres obviously much more to this as you undoubtedly know, which probably isn’t wise to post on a public forum, but this really comes down to if the other half wants out, if there’s no need, you need to stump up the cash to interest him/her enough to make it happen. It will come down to a negotiation as always.
~ 2 million lost income over 20 years. £100k per year.
~ 2 million lost asset value at year 20 + any increase in captain gain
If I had no need to sellout, I would definitely want my half of the asset value, plus at least 50% of lost income over the term. So at £3 million I would consider your offer.
Theres obviously much more to this as you undoubtedly know, which probably isn’t wise to post on a public forum, but this really comes down to if the other half wants out, if there’s no need, you need to stump up the cash to interest him/her enough to make it happen. It will come down to a negotiation as always.
Op please further explain this scenario, if I started a business with you today that I can exit in a few months but still want 50% of its success over 20 years I think I’d be certified. Whoever is staying to run the opportunity would surely just start up alone and dodge losing a % to a partner over 20 years. (I think a salient detail may be amiss however)
If I was guaranteed £100k a year for 20 years plus £2M lump sum when the asset is sold in 2040 I would probably be looking for £2M to buy me out today. This figure may seem low but I figure;
- £100k a year is good money but potentially not life changing in the same respect as a £2M lump sum.
- I would presumably have to work 35-40 hours per week for that £100k whereas I wouldn’t have to work for the £2M buy out.
- I would prefer the £2M now when I’m 35 rather than when I’m 55.
- £100k a year is good money but potentially not life changing in the same respect as a £2M lump sum.
- I would presumably have to work 35-40 hours per week for that £100k whereas I wouldn’t have to work for the £2M buy out.
- I would prefer the £2M now when I’m 35 rather than when I’m 55.
msport123 said:
If I were the partner you are looking to buy out, I would initially assess valuation based as follows:
~ 2 million lost income over 20 years. £100k per year.
~ 2 million lost asset value at year 20 + any increase in captain gain
If I had no need to sellout, I would definitely want my half of the asset value, plus at least 50% of lost income over the term. So at £3 million I would consider your offer.
Theres obviously much more to this as you undoubtedly know, which probably isn’t wise to post on a public forum, but this really comes down to if the other half wants out, if there’s no need, you need to stump up the cash to interest him/her enough to make it happen. It will come down to a negotiation as always.
As above, DCF is relevant here. The value has to be compared to, say, the selling party taking their £ and putting it into a BTL or similar. Let's say they can earn 5% on the capital, so we'll call that the "discount rate."~ 2 million lost income over 20 years. £100k per year.
~ 2 million lost asset value at year 20 + any increase in captain gain
If I had no need to sellout, I would definitely want my half of the asset value, plus at least 50% of lost income over the term. So at £3 million I would consider your offer.
Theres obviously much more to this as you undoubtedly know, which probably isn’t wise to post on a public forum, but this really comes down to if the other half wants out, if there’s no need, you need to stump up the cash to interest him/her enough to make it happen. It will come down to a negotiation as always.
Run a DCF over 20 years with incomes of £100k per year plus the extra £2m in 20 years' time and you get a result of just under £2m.
For clarity, I am the party that has been offered to be bought out and was enquiring how to value the future investment. After the initial post, I`ve spoken to my accountant, and he is assessing it for me.
Due to this being a public forum, I apologise for not going into too much detail. This isn`t even my usual PH profile.
I bring to the table something that Party B cannot replicate themselves. In brief, B owns a plot of land, and we have agreed to build it out and lease it via the local council. As it`s public funding it`s not for anyone to set up and replicate.
I wouldn`t mind being in it for the long term however, as stated above, I could use the money for other development projects. Especially as I`ve been asked to supply 100+ self-contained units for my client over the next few years.
I can find the projects, the problem I`ll have is finding all the private funding for all the equity required to get them built or converted.
Due to this being a public forum, I apologise for not going into too much detail. This isn`t even my usual PH profile.
I bring to the table something that Party B cannot replicate themselves. In brief, B owns a plot of land, and we have agreed to build it out and lease it via the local council. As it`s public funding it`s not for anyone to set up and replicate.
I wouldn`t mind being in it for the long term however, as stated above, I could use the money for other development projects. Especially as I`ve been asked to supply 100+ self-contained units for my client over the next few years.
I can find the projects, the problem I`ll have is finding all the private funding for all the equity required to get them built or converted.
Only you know the number that it is worth then
However, consider this. Having that 'guaranteed' income & the asset too is something that you could use as security for borrowing for future projects in one way or another
If the income is government backed and suitably index linked, it is a good thing to keep imo and I would be a very reluctant seller in the position you have outlined.
However, consider this. Having that 'guaranteed' income & the asset too is something that you could use as security for borrowing for future projects in one way or another
If the income is government backed and suitably index linked, it is a good thing to keep imo and I would be a very reluctant seller in the position you have outlined.
Ahhhh, OP turns out to be the party being bought out! Didn’t see that coming! Who’s the villain in this play?!
Great position to be in, very well done!
DCF, back of a fag packet, call it what you will, you will have a figure in mind what will interest you and it will come down to negotiating.
You have a great opportunity what to put the funds into, but don’t overlook that finance can be arranged in many different ways for the venture you’re looking to do. Happy to discuss my experience with this over PM, there may even be some mutual benefit.
Why not keep this as your guaranteed income and raise the finance for the other project. Safest way to take a risk as you’ve got guaranteed income coming in for the next 20 years with asset value.
Great position to be in, very well done!
DCF, back of a fag packet, call it what you will, you will have a figure in mind what will interest you and it will come down to negotiating.
You have a great opportunity what to put the funds into, but don’t overlook that finance can be arranged in many different ways for the venture you’re looking to do. Happy to discuss my experience with this over PM, there may even be some mutual benefit.
Why not keep this as your guaranteed income and raise the finance for the other project. Safest way to take a risk as you’ve got guaranteed income coming in for the next 20 years with asset value.
msport123 said:
Ahhhh, OP turns out to be the party being bought out! Didn’t see that coming!
This text in the opening post was a bit of a giveaway: "Bear in mind, it`s the party member that has brought everything to the table, except the asset, who has been made an offer to walk away."When asking for a valuation, when someone talks up a particular party's contribution, it is highly likely that they are the party concerned. I smell these things as I have a lot of experience dealing with people buying / selling businesses (and business assets).
While the DCF suggestions are interesting, I would say DCF is not useful in most situations like these. The "discount rate" applied in a DCF calculation is subjective. Use one rate and you get one value, use a different rate and you get a completely different value. For example, one party may see the cost of capital as being unusually low at this time and may want an adjustment built into the model for a potential future increase in interest rates.
There is NO valuation method that gives an accurate valuation for something like this. I find that this is a difficult concept for most owners of small businesses to understand. There is no one single value for a business. Value is in the eye of the beholder.
These two just need to sit down and discuss it sensibly, as JPJPJP says, or use an arbitrator.
A Texas shootout / Russian roulette might also be worth considering.
Blown gaskets said:
After the initial post, I`ve spoken to my accountant, and he is assessing it for me.
Blown gaskets said:
khushy said:
It sounds like a farmers field of solar panels :-) + commercial FIT
No, it`s a resi building. A block to be precise. A Chartered Valuation Surveyor will tell you its value. Long term government let buildings are traded regularly and have a yield appropriate to the property / income profile. If it's genuinely 25 years unbroken income, then the value will derive from what an annuity fund will pay for the asset.
You'd need someone from one of the large national surveying practices as I'm not sure a small local valuer would understand the nuances of the annuity market.
If you want a recommendation feel free to message me.
elanfan said:
A new residential block might be valued now at £4M but once it’s been used and abused by DSS types for 20 years it might only be worth knocking down. Just my 2p
Correct. A purchaser will assume £0 residual value upon expiry of the lease, they won't even take into account the land value. For a 25 year gov lease it's all about the income yield.Gassing Station | Business | Top of Page | What's New | My Stuff