Business Times of Edmond, Oklahoma May 2018 - Page 22

BUSINESS MATTERS JIM DENTON Ledger Lines Breaking Up Is Hard To Do! A college professor of mine once said that “who you partner with in business is arguably a more important issue than who you marry.” I certainly agree with his sentiment, if not the statement. Forming or joining a partnership, a limited liability company, joint venture or a corporation with another person is an exciting thing for business people. It is likened to a new marriage, full of possibilities and dreams. No one thinks of the downside. Some important issues may go unconsidered. Questions like: What happens to our contributions if things don’t work? What is my sweat equity worth? What is our unwinding process? To many people, such matters are icky and awkward. It’s an uncomfortable exercise for the crowd that shuns estate planning, runs from picking their gravestone and thinks fire insurance is too expensive. It’s advisable to employ an attorney familiar with business entities to help you and your business partners think through scenarios and consider the best safeguard for the ongoing enterprise and the heirs of the partners should the unthinkable happen. The attorney can then help with document preparation and execution. It is always worth the money. The biggest issue surrounding ‘breaking up’ involves valuation. The main question, “when and how much should the parting investor be paid?” must be addressed. Your operating agreement or your buyout agreement should be clear as to how this question of valuation should be handled. This is a key question to answer at the very beginning of the company’s life and should be addressed and readdressed as the business matures. Businesses that have not revisited such matters could possibly pay a price that may be regretful for the ongoing enterprise. Tax considerations are also paramount. The sale of an interest in a business may be capital gain, a capital loss, or could be excludable from income under Sec. 1202. Make sure your tax accountant is consulted. Agreements may be silent or indicate that the owners are to receive the balance of their capital accounts. That may work if everyone works in the business and puts in the same amount of money and the business has such liquidity. This is not always the case. Partners often bring intangible value or other values to the business and that is where these matters of valuation can become contentious. A good practice in drafting a “winding up” section of an operating agreement or a buyout agreement would be to name a valuation expert and the valuation method (multiple of earnings, assets, revenues, etc.) that would be used as either a final amount or a starting point in negotiations for a buyout. This avoids disputes about assumed discounts that remaining partners often believe are due them. A variation on that practice would be for the outgoing partner to hire a valuation expert and the purchasing party hire a valuation expert and agree that the average would be used as the starting point in negotiations. The valuation method would be agreed-upon in advance and assumptions like interest rates would be clear in the agreement. Above all, business owners should plan on how they are going to wind up their business when they are done. It just makes sense. Like Neil Sedaka sang back in 1962, “Breaking up is hard to do!” JIM DENTON is a CPA and a managing partner with Arledge & Associates P.C. in Edmond. He may be reached via email at jim@jmacpas.com. 22 May 2018 | The Business Times