Case Study: Minority Partner Takes Charge

In February of this year, a minority partner in an office supply business approached our firm to help him determine the cost of his business.

The minority partner received a buy/sell agreement from his partner of 6 years in early December of 2019. The majority partner assumed that his partner would just pay him the amount he wanted without question. He was incorrect.

The minority partner, we will call him Owner 1, had not seen the financial statements, bank statements, company minutes, or even the sales transactions in five years. Owner 1 knew that he needed to see the bank statements, but didn’t understand the power in his financial statements.

In January 2020, Owner 1’s partner provided him a box with copies of the last 5 years of profit and loss statements and balance sheets. The box also contained bank statements, copies of the corporate paperwork, insurance policies, and many other documents pertaining to their business.

Owner 1 came to us with his box of papers and asked if we could help him determine a value of his business because he thought his partner was asking for more money than his 45% was worth.

Our process starts with an initial review of the financial statements to ensure that all the numbers balance. Our valuation process requires at least two years and can go back as far as five years. In Owner 1’s case, we reviewed all five years of the financial statements and they all balanced.

Our team of analysts went to work on entering the financial data into our system, and generating the 50-80 page report which includes two different valuations which includes a Discounted Cash Flow Valuation and a Terminal Valuation.

In about 4 business days, we had a value for Owner 1 on how much the business was worth.

The business itself was successful and full of potential. When conducting the analysis our team looks at 5 key areas of business including Liquidity, Profitability, Sales, Borrowing, and Assets. This company scored in the top 20% in all of these areas of business.

While the company was scoring in the Top 20% in the areas of business we analyzed, the company was projected to have a negative sales growth 3%. This was a positive for Owner 1 when he went to the negotiation table.

An interesting twist to this case was the Owner 2 who wanted out of the business was willing to take a pay out on the business. He was willing to surrender all of the account receivables including the ones that we sold.

The Company had a Net Free Cash Flow of just under $500,000, and the company’s EBITA was $500,000.

As mentioned before, the company was projected to have a sales growth of -3% year over year. The company’s projected sales in 2025 is $2,400,000.

Our process looks at two different types of business valuations, the Discounted Cash Flow and the Terminal Value.

These are typically more accurate than an EBITA valuation because it takes into consideration future cash flow. If the company would have had a negative cash position, then the EBITA valuation method would have been necessary.

Since the owners were looking to get the deal done in a matter of months, the Terminal Value was provided.

The company’s Terminal Value was $1,600,000. Since Owner 2 was willing to walk away from the accounts receivable, they were backed out of the final value. The receivables amounted to $700,000.

An addendum was attached to the valuation deducting $700,000 from the overall value of $1,600,000. Which left a value of $900,000.

Owner 2, who wanted out of the business, owned 55% of the business. Owner 1, the owner who engaged our services to determine the value, retained the remaining 40%.

Owner 1 was going to the negotiation table with an offer of $560,000.

Owner 1 was comfortable with the value, but didn’t know how to go about carrying out the transaction. We referred Owner 1 to a business attorney who we had conducted work with in the past to help with the transaction.

Within 2 months, Owner 1 took full control of the company. Owner 1 ended up paying Owner 2 more than the $560,000. The last time we spoke with Owner 1, he was searching for a full time salesperson, and a full time office manager. 

To see how the 360-CBA can help your business or one of your clients, we invite you to book a walk through with one of our analysts: https://calendly.com/360-cba/30min