When partners split up, there are problems with money and value. Almost always. Oh yes; there was that one time…
This post refers to a dissolving marriage as a model. But the points made, hold for most partnership dissolutions. They are not pleasant, but applying some rules keeps things fair.
Complications arise when married people split their joint estate. If one of the assets includes a business, the recipe is more than “take the white from the egg”.
- What is the value of the business?
- Where are business proceeds entering each spouse’s pocket?
- Open and fair negotiation
1. What is the business value?
The dissolution of any partnership is a transaction itself. It should be accounted for, with a market-related valuation. Business valuation methods start with the company’s financial statements. But the concurrent interrogation of key valuation indicators in the business is critical.
Competent and confident valuers are bold in declaring shortfalls in the discovery. Do not ignore their messages. The valuer will have taken heed of the shortfalls, in arriving at a number. Those noted shortfalls can provide valuable information for later use.
2. Where is each partner currently benefiting?
Every valuation accounts for an element of “normalising” the income statement. This involves removing or adding items which are “out of the ordinary”.
That exercise should also examine what each partner receives before the dissolution, and adjust for what each will receive after the dissolution. Consider adjustments for replacing the partner in day to day work. Understated assets and income, or exaggerated liabilities and expenses mean lower business valuations.
A fair negotiation recognises pre partnership equity. The change since then is what you are after.
A fair settlement considers an ex-partner receiving double recovery for a single asset. That would be inequitable.
The most significant asset in a marital estate is often the family business. A fair resolution hinges on an accurate valuation of it. Work with an experienced valuation expert who understands sound valuation concepts. Don’t play the “tarms 20” game.