How to calculate business worth for a buy in (?)

[mikestr]

I hope this is the right section.

I am planning to buy into a friend of mine's irrigation business he has been running for 20 years. Business is so good he cannot keep up and needs a 50% buy in partner to help split the company and run either the installation or service division.

The question is: How does he/we calculate the worth of the company to establish my buy in amount?

Thanks in advance!

[ericmcj31]

I'd be interested in this too--gonna watch this thread.

[mikestr]

I guess nobody knows?

[snomaha]

Dumb question but why does he want a partner instead of a employee?

[mikestr]

Dumb question but why does he want a partner instead of a employee?
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[mikestr]

Not sure if it a relevant question but he is looking for someone with a vested interested.
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[snomaha]

Talk to your accountant or attorney and ask for a referral to a business valuation expert. You should be able to find someone to review the last 3 years of financials and help with the due diligence. The buy in price will probably be based on a multiple of net, reoccurring revenue vs. blue sky and tangible assets.
Will you be taking on any debt he has?
Does the business have any skeletons in the closet like tax liability?
Are there any pending liens or judgements against the company?
Will there be an exit strategy in place in case things don't work out?

[mikestr]

Thanks Snomaha, I appreciate your input.

What dissadvantages would I have going in as a 49% holder of the company? He would like to to that for a couple of years to feel me out since he has been in business for over 20 years. Please let me know your thoughts.

[snomaha]

He wants to keep the hammer by retaining the majority shares.

I have known business owners who incorporate a "Mexican shootout" clause into the partnership agreement. When you or your partner decide to dissolve the partnership you submit a bid indicating the minimum price for which you would be prepared to sell your shares. The other partner then decides if they want to sell their shares at the price or buy your shares at the price submitted. All partnerships end at some time and I think its worth having an exit strategy in place.

I have had some experience with partnerships and will end by saying free advice is worth as much as it costs and I did stay at a Holiday Inn Express last night.

Good luck.