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How Much is a Partner's Share Worth?

The sale of a partnership interest is sale of marriage.

How Much is a Partner's Share Worth?

All too often I am asked to assist two or more shareholders resolve a financial matter where one partner shareholder would like to leave (retire, move on in life, etc.) and is thus looking to their remaining partners to purchase their interest.

What’s the worth of the departing partner’s share in the veterinary practice?

While I can complete a valuation of the practice and produce a fancy report that confirms the practice as being worth a certain amount, in the big boy’s world, the partner’s share is worth exactly what someone would be prepared to pay for it. When the remaining shareholders choose not to acquire the retiring shareholders’ share, the departing shareholder has only the option of going to the market place looking for a potential investor and negotiating the best deal possible. A crime really when one considers the amount of time and effort contributed over the years to the practice, but should the retirement responsibility of one individual be left to the remaining shareholders? When it is time for the remaining partners to sell their share, who do they sell it to and for what amount?

The sale of a partnership interest is sale of marriage.

The financial investment is controlled by the remaining partners.

All too often, partnerships begin over a drink and amongst friends thinking if you can study and drink together, why not be partners? Despite suggestions and recommendations, the partners decide not to waste money on a Shareholders’ Agreement, I mean “who can understand all the legal jargon and have you seen what the lawyers want for one of these agreements?”

I am now working with two companies where the ownership principals are progressing towards retirement. In the one case, the partnership has been together for over twenty five years and we are just now attempting to draft a shareholders’ agreement and resolving some very important questions such as; If a partner wants to reduce the amount of work commitment, at what point does their share of profits diminish accordingly? How much notice should an active and an integral operational principal give to reduce hours or retire? Naturally, the big question to be asked is who is going to purchase the principal’s shares?

In the other partnership case, one principal has been working four days per week for several years now, while the other principal works five days per week with each principal draws equal compensation and profit distribution. The questions we are now grabbling with include; How should compensation be calculated given the different work schedules? With differing ages, is the younger principal going to purchase the other’s share investment? Thankfully there is a Shareholders’ Agreement in place with a “shot gun clause”, if we are unable to reach resolution. There is a resolution, but it comes at a very risky cost, leaves a very sour taste in everyone’s mouths and the friendship has turned to enemies. 

Under a Shot Gun Clause of a Shareholders’ Agreement, one party tenders an offer to purchase the other’s financial investment in the company with the recipient either accepting the offer or purchasing the partner’s investment under the same terms and conditions as set out in the original offer. There is no negotiation, no discussion. Quick Resolution!

Unlike a marriage when one party get to sleep on the couch, partnership difficulties can be an emotional roller coaster, be extremely expensive to resolve and end up with friendship and financial ruin. If your partnership doesn’t have a shareholders’ agreement begin working on one; you will find the process enlightening and once completed extremely comforting. 

If you have a shareholders’ agreement review it at least three to five years before one party plans to reduce work hours or retire. 

Unfortunately most times shareholder agreements fail to deal with a principal reducing their work hours nor appropriate notice of a principal’s intention to reduce hours or retire. Most shareholder agreements do not provide for the remaining shareholders to acquire the departing shareholder’s financial interest for retirement.

This is not a discussion you want to have on the Friday before the Monday you begin your new work schedule!

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  • How Much is a Partner's Share Worth?

    How Much is a Partner's Share Worth?

    All too often I am asked to assist two or more shareholders resolve a financial matter where one partner shareholder would like to leave (retire, move on in life, etc.) and is thus looking to their remaining partners to purchase their interest. Read More...