• Home
  • Services
    • Audit
    • Small Business Accounting
    • Consulting
    • Estate & Trust
    • Forensic & Fraud Prevention Services
    • Succession & Acquisition
    • Tax Planning & Compliance
    • Valuation & Litigation Support
  • Industries
    • Construction
    • Finance and Leasing
    • Manufacturers and Distributors
    • Health Care
    • Real Estate
    • Restaurant and Retail
    • Service
    • Not-for-Profits
  • About Us
    • Affiliates
    • Memberships
    • Mission & Vision
    • Leadership Team
    • Our Firm’s Peer Review
    • Recognition
  • Careers
  • Resources
    • Blog
    • Newsletter
    • Succession Planning Guide
    • Profit Planning Guide
    • SafeSend Tax Returns
Contact
  • Home
  • Services
    • Audit
    • Small Business Accounting
    • Consulting
    • Estate & Trust
    • Forensic & Fraud Prevention Services
    • Succession & Acquisition
    • Tax Planning & Compliance
    • Valuation & Litigation Support
  • Industries
    • Construction
    • Finance and Leasing
    • Manufacturers and Distributors
    • Health Care
    • Real Estate
    • Restaurant and Retail
    • Service
    • Not-for-Profits
  • About Us
    • Affiliates
    • Memberships
    • Mission & Vision
    • Leadership Team
    • Our Firm’s Peer Review
    • Recognition
  • Careers
  • Resources
    • Blog
    • Newsletter
    • Succession Planning Guide
    • Profit Planning Guide
    • SafeSend Tax Returns
Call Us
Get Directions

Blog


Home / Blog / Buying Out Your Partner

Buying Out Your Partner

October 2, 2013 by Stephanie Potash

est

This issue brought to you by:

Michael Dentamaro & Hannah Thoms

Michael Dentamaro & Hannah Thoms
Gordon Advisors. P.C.
michael.dentamaro@gordoncpa.com
https://gordoncpa.com

 

MMS, Inc., a computer service business, had survived recent industry turbulence through the persistent efforts of its owners, Ralph McMillan and Janet Shaw. In fact, MMS had enjoyed good cash flow for the past three years and its future looked rosy. Successfully meeting these challenges made Ralph (age 59) more anxious than ever to leave the business and Janet (age 48) more than ready for Ralph to leave. But neither owner had a clear idea of how to proceed, who to ask for guidance or even how to take the first step.

Janet and Ralph had to find the starting line before they could run the course to the successful dissolution of their partnership.

Ralph’s Tasks

First, Ralph must assess his income needs and timing of his exit. He must determine how much of the purchase price he needs (or wants) on the day he leaves and how much he is willing to receive after he leaves (a Retirement Needs analysis). This is a very different question from how much his interest is worth yet the questions are related because the cash Ralph needs must be attainable from the sale of his interest.

Second, Ralph must obtain an independent valuation of his ownership interest.

Note: Ralph is unwilling to leave unless he exits with full value for his ownership interest (hence the need for the valuation) and unless that value is enough to meet his retirement needs (hence the need for a retirement income needs analysis).

Janet’s Tasks

Janet wants to balance the risk/liability she and the business will assume in Ralph’s buy-out with the opportunity for continued growth in the value of business interest. Since Janet is likely to be unwilling to buy Ralph’s interest—if doing so puts her (or the business) at too great a financial risk—she must secure a professional’s projection of the company’s future cash flow.

This cash flow projection with enable Janet to determine if the business will likely have enough cash flow (after Ralph leaves) to finance the purchase of Ralph’s interest without stifling the growth and prosperity of the business.

Ralph’s Exit Plan Design

Ralph’s Exit Plan should be designed to:

  • Use the available cash flow in the most tax-efficient manner possible.
  • Plan the long-term ownership structure of the company.

For example, after Ralph is gone, what does Janet (the remaining owner) intend to do with the business? Does it not make sense to consider her future exit when Ralph’s exit is being designed and implemented?

Ralph’s Alternatives

As Ralph contemplates his exit, perhaps Janet should consider:

  1. Selling all of the ownership to an outside party. To do so, the business must be marketable and Janet (and perhaps even Ralph) may need to remain for a year or more after the sale. In this scenario, Ralph has a better chance of receiving at least the bulk of the purchase price.
  2. Selling Ralph’s interest to key (or all) employees. This strategy depends on the existence of motivated management willing to assume ownership. Often, a partial sale to a younger management group (keeping control firmly in the hands of the remaining principal owner) makes great sense. This strategy starts to pave the way for the eventual sale of the remaining owner’s interest to this group, can be a great motivation tool and handcuffs this management team to business.
  3. Selling all (or just Ralph’s interest) to an Employee Stock Ownership Plan (ESOP). This design can potentially offer tax and cash flow savings for both Ralph and the buyers.

These are just a few of the many ways to design the exit of a co-owner.

Before any group of co-owners can create a successful exit plan they must employ professionals to:

  1. Assess the departing owner’s needs (a retirement income needs analysis);
  2. Secure an independent valuation of ownership interests; and
  3. Assess the remaining owner’s risk tolerance (dependent on a cash flow projection).

If you are a co-owner and are thinking about how to maximize the chances for a successful exit of either you or your co-owner, please give us a call. We can help you to create a buy-out plan that helps you to achieve your buy-out goals.

 

Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code or; (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

© Copyright 2013 Business Enterprise Institute, Inc. All Rights Reserved


Recent Posts

  • New Gordon Advisors, P.C. Shareholders Announcement
  • Nine financial KPIs construction firms should be tracking
  • How better job costing is the key to unlocking greater profitability for your construction firm
  • Biden Administration Releases Explanations of FY2022 Budget Tax Proposals
  • What Businesses and Individuals Should Know for the 2020-2021 Tax Season

Categories

  • Accounting
  • Business
  • Economy
  • Gordon Advisors, P.C.
  • Litigation / Valuation

Testimonials


“Many years of accurate, thorough, prompt service regardless of which employee or department.”


— President, Manufacturing. Gordon Client for over 30 years. —

“Always there for our family and our business. 100% trust from all partners. Service could not be better. ”


— CFO, Retail. Gordon Client for 18 years. —

“Easy to work with - professional and friendly!”


— Individual, Trust Accounting. Gordon Client for 7 years. —

“Excellent service and excellent advice.”


— Individual. Gordon Client for 11 years. —

“Friendly, trustworthy, knowledgeable, quality work, at a reasonable price. ”


— Individual. Gordon Client for 15 years. —

“I & our companies have worked with Gordon Advisors for many years and they have always been high quality.”


— Owner, Restaurant. Gordon Client for over 30 years. —

“We have been with your company for many years and still have a very good relationship. We are always given the best advice and receive total co-operation. ”


— Trust. Gordon Client for 8 years. —

“Gordon Advisor has always gone the extra step addressing my needs, answer my questions and making me feel special. Even though I'm not their biggest customer. ”


— Individual. Gordon Client for 17 years. —

“We have been working with Gordon Advisors for 20+ years. Wonderful people. ”


— Controller, Manufacturing. Gordon Client for 22 years. —

“As we are a charity, I would recommend their services to other charities as they are familiar with the needs of a charity. ”


— Executive Director, Not-For-Profit. Gordon Client for 14 years. —

“The staff are all highly capable, friendly and accessible. Gordon Advisors are a great resource to our organization and have always treated myself, the staff and my Board of Directors with the utmost respect. ”


— Executive Director, Not-For-Profit. Gordon Client for 12 years. —

“Excellent relationship with Gordon Advisors for the past 34 years. They do our yearly audit and are professional, caring and efficient. We are extremely happy with the work done for us, and the board votes every year to keep them as our auditors. ”


— Executive Director, Not-For-Profit. Gordon Client for over 30 years. —

“Over 20 years of service. They are friendly and professional. We've never been disappointed. ”


— CEO, Construction. Gordon Client for 20 years. —

“We always receive good service and value. A great friendship and understanding has been developed over the years. ”


— CFO, Manufacturing. Gordon Client for 18 years. —

“They have been very helpful and responsive, and have always met our needs. ”


— Manager, Hospitality. Gordon Client for 7 years. —

“The service provided is consistently delivered on a timely basis with value.”


— CFO, Medical Device Manufacturing. Gordon Client for 14 years. —

Contact Us

248.952.0200

248.952.0290

1301 West Long Lake Road
Suite 200
Troy, MI 48098

Helpful Links

  • Home
  • Services
  • Industries
  • About Us
  • COVID-19 Resource Center
  • Leadership Team
  • Careers
  • Blog
  • Newsletter
  • SafeSend Tax Returns
Gordon Advisors

2022 © Gordon Advisors, P.C. | All rights reserved.