There are myriad reasons why you might want to introduce a new business partner. Among these reasons are:
- You may be planning to retire;
- They’d provide additional funds to expand the business;
- They may bring skills and experience that you don’t have;
- You want to share the workload.
It’s a big step, particularly if you don’t know how to value a small business. If you’re considering bringing on a new partner, we’d encourage you to consider the following advice before you agree anything.
How to Value A Small Business
Unfortunately, your prospective business partner may not value all your hard work as much as you do. They may not even share the same vision that you initially had.
Many people wouldn’t know how to value a small business. Many cash based businesses are often undervalued as their financial statements do not reflect the true reality and extent of sales achieved.
Why waste time on tyre kickers? Get your business valued to understand your business’ market value before you start negotiations?
Lack of Transparency Causes Issues
We cannot emphasise enough that well-documented agreements are important. Think of them as the equivalent of marital pre-nuptials!
Ambiguity may lead to future issues and conflict. It’s typical for both parties to be full of optimism and therefore reluctant to tackle some difficult conversations.
Why would you think about discussing future exit processes so early in the partnership? Without clarity, you could end up working with someone you don’t even know!
What rights will either of you have when it’s time to leave the business?
Procedures should be clear so both parties understand the process. For example: how much notice will you need to give each other? Who can you sell your shares to? Will your new partner have to give you first option to buy their shares if they decide to sell?
Relationships can quickly deteriorate if roles and responsibilities are not agreed or clearly defined. Inequity can arise when one person undertakes more responsibilities than the other without be duly compensated. To avoid this, make sure you discuss remuneration, bonuses, profit-share and other benefits before putting pen to paper.
How Well Do You Know Your Prospective Partner?
You’ll be giving up some control (and therefore power) to someone else, so don’t underestimate how important it is to do some background checks. It’ll be much easier to walk away before becoming partners than it will be later.
Your new partner’s history may come back to haunt you. They say that a leopard doesn’t change its spots. The actions of your new business partner may directly impact you. Have they been banned as a director? Have they run a business that was liquidated for failing to pay its bills?
Help protect yourself and talk with your chartered accountant or solicitor to form the right agreement and appropriate business structure.
Tax, Tax and More Tax
You’ll need to determine the right business structure for tax. How will introducing new business partner change your tax obligations? Will your legal structure change, giving rise to potential tax liabilities?
Tax legislation makes it much more difficult to reverse a tax position when it’s been taken. It’s much easier to determine an optimum tax position before you complete any sale.
Rules exist to determine how to deal with tax losses brought forward when new shareholders are taken on. Thresholds can be inadvertently breached and tax losses extinguished.
Are you considering combining your business with someone? You’ll need to consider that current market values for your assets may give rise to further tax obligations.
Taking on a new business partner to pool resources, skills and knowledge may be tempting in today’s market. If you want to know how to value a small business, get in touch with us for more details.
We encourage you to make sure you do the necessary leg-work up front to help assure you that your decision pays off.