My friend has an established business and he wants me to be his partner. He is trying to determine the amount I need to contribute to buy into the business. How is this amount usually determined? My friend has mentioned the amount he has had to pay for rent and other bills to keep his business going. In order to buy into his business, do I have to pay half of all of the money he has put out to maintain his business?
This is obviously a negotiable amount. But, for your own peace of mind, you may want to have a business valuation done and/or have the books audited so you know in black and white, what exactly you are buying.
My standard disclaimer: I am not offering legal advice, assume I do
not know the law in your state or at all for that matter and that I am
just making suggestions for starting points for when you do speak with
an attorney. Do NOT rely on anything I write and contact a lawyer in
your area immediately after reading my posting.
I am not licensed to practice law in California so the following should not be construed as legal advice. If you want legal advice, you should consult a lawyer licensed to practice in California.
Certified public accountants offer the service of valuing businesses. Determining the value of a business is a fairly complicated process which can involve looking at the business's historical cash flow, the value of intangibles it owns, the value of its accounts receivable, the kind of industry in which the business competes, and many other factors. If your friend wants you to become an owner of the business, you ought to be able to look at the books showing the business's assets and liabilities. A CPA can assist you by providing a ballpark figure for the business's value. You do not say what percentage interest in the business your friend is offering you. Is it a 50% share?
You may want to hire counsel to prepare a partnership agreement. Putting your agreement in writing, especially with respect to what rights and obligations each of you have, may help prevent disputes in the future.
Disclaimer: the respnse provided below is informational only, and should not be relied upon as legal advice. The response provided below does not create any attorney-client relationship.
You and your friend can negotiate the price. To help you set proper price range, you would be well advised to have the business evaluated by a professional. The value fo the business usually is determined by looking at comparable business, by looking at the business's current income level and potential for growth, or similar factors. Costs of maintaining the business are not considered alone, but they may be considered in the context of determining the business's profitability. Consult your own attorney and business valuation professionals to make the proper decisions.