Assume a 5 year old LTD service based business, equally owned by 2 partners, healthy P&L and client list, healthy projections, some small level of brand awareness and IP. If 1 partner wants to amicably leave and ‘sell’ shares to the other partner, how to go about a fair valuation?

Any simple or straightforward principles?

Thanks

A simple multiple of the current profit is a good start.

The amount of the multiple depends on the industry

Fairly common for the firm’s accountants to have an advisory practice or recommend a third party. Need to look at assets and debt (if any), prospects for growth, “quality” of profits, how easy it would be for a competitor to take business etc

All sorts of deals possible, straight cash purchase, staged buy out giving a decling share of profits/shares over time etc etc

Hard to put a number on things without seeing detail – total guesswork 5x profits so partner get’s half that ?

Look at your Articles of Association and Shareholders agreement – there is probably something akin to ‘appointing a mutually agreed expert’ for the valuation. This could be your accountant if you’re both in agreement. They then have models they draw upon, which will likely include past performance, implications of selling a non controlling share, and future projected performance (taking in to account market/sector/business plan etc). Consider the cost (legal and accountant) of the separation and take these in to account. Also been through this (but slightly less amicable). Key for you personally is good legal and accountant advice just to safeguard yourself and ensure all the ‘i’s are dotted, and ‘t’s crossed so that you can move on a seamlessly as possible.

5 times annual profit would be a starting point.

thanks all. The profit multiple seems a good start point

use EBITDA rather than profit to properly value

also have a chat to your accountant

If you’re the seller, prepared to either fall out with the buyer, or settle for less than you want – and vv.

But, how much is the business dependent on the one leaving? This is really the key point as to whether the business has any value at all.

All points as raised above, base on EBITDA, if a 2 man biz you would be losing 50% of your sales marketing and delivery!, get a professional on the job , minor investment and makes it independent. Expect to not trade Christmas cards ever again 😉 also, watch Non compete but write in confidentiality clauses and restraints where possible.
Col (sold 2, made some mistakes along the way, used a pro and had a much better result last time !!)