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There are a multitude of reasons why you might want to value your partnership. At the start of a business endeavour, you might foresee the possibility of the need for partnership valuation. Likewise, your partnership agreement will often dictate the value of the partnership or the valuation procedure you must use. There are three common methods of valuation, which you may combine to determine your partnership’s value.
After valuing the partnership as a whole, you can determine each partner’s value in accordance with their percentage of ownership. To help you understand this process, this article will take you through the three commonly-used methods by valuers to value a partnership.
Asset Valuation
One way that a valuer can value a partnership is through asset-based valuation. Using this method, the evaluator will determine the market value of both tangible and intangible assets.
With this approach, you will also need to assign liabilities as per their market value. These liabilities are then subtracted from the market value of the company’s assets to determine the market value of your partnership.
An asset-based valuation can be more complex for partnerships than other types of business evaluations. This is because the interests in a partnership are not usually liquid, which results in a lack of marketability for investors. Further, partnerships with a silent partner are less appealing due to the lack of corporate control. A silent partner is one who exercises little control over the business.
Each of these factors will often result in a reduction in the value of the partnership.
Market Value
A market value approach requires analysing highly comparable partnerships to determine the business’ market value. To find a comparable business, you should consider several factors. Firstly, a comparable partnership should operate in the same industry and be similar in size, structure and profitability. The comparable partnership should also have similar business operations and a similar customer base.
For a simple reference, analysing one similar partnership may be sufficient. However, for a high degree of accuracy, you should perform multiple analyses. Comparisons should also be as recent as possible to ensure the information is as accurate as possible.
A key issue with this approach is the difficulty of finding information on comparable partnerships. Additionally, if the partnership in question is quite niche, it will be challenging to find a comparable business. This can make the results unreliable.
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Income Approach
The income valuation method uses the expected future earnings of the business to determine the partnership’s value. First, by considering current sale volumes and prices, the valuer can project the business’s future value. Next, you can use this data to determine a present value discount rate. Finally, the evaluator uses these figures to determine the value of the partnership, multiplying the estimated future earnings by the present value discount rate to value the partnership.
The income valuation method relies on the partnership having a steady increase in value. Because of this, it is generally not recommended for partnerships that are not well established.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Key Takeaways
There are several circumstances in which you may seek to value your partnership. Where the partnership agreement does not dictate the value of the partnership, it will usually outline a valuation method. The three main approaches a business evaluator might take are an:
- asset-based evaluation, where the market value of the partnership’s tangible and intangible assets are used to determine the overall value of a partnership;
- market value approach, where highly comparable partnerships are analysed to determine the business’ market value; or
- income-based evaluation, where expected future earnings are used to determine the value of the partnership.
If you need assistance valuing your partnership, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.
Frequently Asked Questions
A partnership is one type of business structure that you might choose. A partnership typically involves two or more people who divide the income and losses of the business amongst themselves. Likewise, it is up to the partnerships themselves to determine the division of profits and losses. Partnerships can comprise individuals, businesses, organisations or government entities.
The partnership agreement will often dictate the value of the partnership or the valuation procedure you can use. If you need to value your partnership but do not have the requisite skills, you can hire an external evaluator to provide an unbiased analysis of its value. There are three main approaches a business evaluator might take. This includes an asset-based evaluation, a market value approach or an income value method.
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