Business Valuation Question

[techstore21]

Hi All,

It would be great to get some feedback and suggestion on the below.

A & B are both 50/50 shareholders in a LTD company offering marketing services. A is responsible for sales and marketing to bring in new clients and general day to day admin. B is managing clients and providing the services clients signed up for. All has been going well for several years.

There is now a situation where A is no longer brining in new clients and general output is low, B is still servicing the existing clients and performing 90% of the operations. Due to the 50/50 shareholding, all monthly profit is being extracted from the company meaning there is no room to hire staff to assist with the workload of B or to employ someone to pick up the slack caused by A.

B has suggested it would be best if A left the company due to performance and has suggested to buy out there shares.

What would be the best way to value the shares?

The company has no assets, on paper is profitable but only due to A & B taking small salaries and the rest in dividends, revenue is not consistent but starting to gradually fall due to lack of new clients. The company is reliant on B being there due to A not being able to service any of the clients needs.

A thinks the valuation should be based on profitability, B thinks the company is worthless due to it’s reliance on them.

Your thoughts and comments welcome!

 

[Picture Bute]

B is correct, but he'll never convince A.

 

[Porky]

Hmmmm
Guessing that you are B and that A is on a free lunch

Seen this situation so so many times and experienced it personally myself and its a stinker. Don't want to add salt to the wounds but as time goes on A will start to feel more and more like a monkey on your back sucking income from your hard work and there is little you can do about it. You position will likely get worse before it gets better. Not what you want to read but i'm not going to sugar coat it.

@Picture Bute comment above is spot on. You will struggle to convince A because A will just see the income landing and remember the good times and wont want to give that up. Any offer you make will look derisory in their eyes and they may even start to actually spite you knowing they can extract the maximum whilst you keep working at the service side because well they can and you can do little about it.

A may even be cheeky and be bold as to suggest they should buy B out but, of course they wont have such intention really, they will have no interest in it only what they can take from it but want to try and use as leverage as they will think you will pay them more to take over.

Ideally you need A to have a dose of realism and accept the business is worth next to nothing but that's going to be difficult. BUT you do need a negotiation here to get out of this. You need an exit price on the table you can negotiate from. Its the only way. You might feel like killing A, these sort of situations can get emotionally charged. You really need to remain cool and focus on the end goal. This is a stalemate situation.

What i did was convince A that i had just had enough, i didn't see much future in it, future is bleak and will get worse. You don't want A to have any fear of missing out, futures bleak. I suggested administration could be the answer and we just split any net asset value. It was a unlikely to ever be more than a low income lifestyle business for one and more money to made in other industry

Ask A if they wanted the business and what they would pay you for your half? see what the reaction is, if its a resounding no then suggest as its effectively not making a profit unless anyone working in it works for low wages would they accept X for it? X being a low figure. they will likely baulk at that but remember this is a negotiation and one you have to reach agreement on.

In my case i ended up having to agree terms that were a bit more than i would have liked and it left a bitter taste in my mouth and reminder why 50/50 business partnerships are NEVER a good idea. This is likely going to be your experience but first you need to get around the table with A and try and get negotiations started. Just don't let it get emotion driven, as that will just delay this even longer, suck it up you need an outcome.

Good luck.

 

[Socio South West]

You have to establish the value of the business as a whole package and then divide the price in proportion to the shareholding. Would anyone be interested in acquiring the business as a whole?

There is no indication of the size of the business - Is this a business business, or does it actually boil down to being a job in all but name? Its pretty clear from what you say there is insufficient margin/profit to support hiring staff, so the latter looks to be the case.

Thus the value is likely to be little more than an estimate of the cost of anyone starting up getting to the same point plus any assets, probably at almost write off rates.

 

[MikeJ]

It doesn't matter how you value it. The only thing that matters is what A is willing to accept for his/her shares.

 

[fisicx]

Set up a new company and tell the existing customers you are renaming. Transfer over the accounts over and start work free of the shackles of A.

When they ask about the drop in income tell them it’s because clients are leaving. Which is correct.

 

[dylanmarlais]

Hi All,

It would be great to get some feedback and suggestion on the below.

A & B are both 50/50 shareholders in a LTD company offering marketing services. A is responsible for sales and marketing to bring in new clients and general day to day admin. B is managing clients and providing the services clients signed up for. All has been going well for several years.

There is now a situation where A is no longer brining in new clients and general output is low, B is still servicing the existing clients and performing 90% of the operations. Due to the 50/50 shareholding, all monthly profit is being extracted from the company meaning there is no room to hire staff to assist with the workload of B or to employ someone to pick up the slack caused by A.

B has suggested it would be best if A left the company due to performance and has suggested to buy out there shares.

What would be the best way to value the shares?

The company has no assets, on paper is profitable but only due to A & B taking small salaries and the rest in dividends, revenue is not consistent but starting to gradually fall due to lack of new clients. The company is reliant on B being there due to A not being able to service any of the clients needs.

A thinks the valuation should be based on profitability, B thinks the company is worthless due to it’s reliance on them.

Your thoughts and comments welcome!

Wind up existing company. Once done, set up new one and carry on. I assume you are a director. If so, you cannot divert business to Newco until the old k e is no longer in existence. That could cause some issues.

 

[WaveJumper]

Good advice from @Porky I would defiantly start down the route of sitting down with A and expressing your wish to move on and to make you an offer, be interesting to see what figures he then puts on the company. Reading between the lines A has lost his drive for the business, cant see him wishing to go it alone so one would hope a more reasonable value / figure can be agreed upon.

 

[Paul Kelly ICHYB]

We seem to have forgotten about what it says in the shareholder agrement!

I think it is time to summon @The Resolver

 

[HFE Signs]

Generally the valuation is a factor of Ebitda, if you can put tangible reason for growth then the factor is higher, if the business is in decline the factor is lower. That is your starting point and then you can look at retained profits, assets, liabilities and so on. But, as above it has to be agreed before the shares can change hand.

 

[BusterBloodvessel]

Ask A what they think half of the business is worth? Whatever they say, state that you will accept that amount from them and they can buy your share instead. Watch them suddenly panic.

And then negotiate significantly downwards from there

 

[Mark T Jones]

The cliché is true - it's worth what someone will pay. And in reality, you are almost certainly the only one with any incentive to buy.

The value to you, I'd suggest, revolves around the cost & inconvenience of walking away & starting again.

As others hae said, the starting point is a frank & open discussion. Who knows, they might be happy to get rid.

 

[The Resolver]

Set up a new company and tell the existing customers you are renaming. Transfer over the accounts over and start work free of the shackles of A.

When they ask about the drop in income tell them it’s because clients are leaving. Which is correct.

If A finds out what has happened and takes advice he will be told that he can issue proceedings against B for breach of statutory duty with B being ordered to pay all profit into OldCo. Not a good idea..

 

[The Resolver]

Wind up existing company. Once done, set up new one and carry on. I assume you are a director. If so, you cannot divert business to Newco until the old k e is no longer in existence. That could cause some issues.

Yes that is the wiser and lawful way to split and continue.It needs the agreement of A or order of court to the effect that the lack of trust/damaged relationship between A and B is damaging the business.

But the real way to reach a fair and mutual agreement is through mediation, I can sort this out.