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Business partnerships are plentiful in the UK. A recent survey found that there are around 350,000 active UK business partnerships. If 1% of partnerships were to change hands each year, approximately ten would be sold every day. However, there is often debate regarding the best way to carry out a business valuation for a UK partnership sale. This article will explore the three main methods to value a partnership, so you can ensure that the sale or purchase monies for a UK partnership are fair and reasonable.
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Valuing UK Partnerships
The best valuation process for a partnership can depend on the partnership’s business type. If the partnership holds a high level of physical assets, then a valuation method that includes such assets would be helpful. However, if a partnership is being sold on the condition that it is an expanding business that will create ever-increasing profit levels, a valuation method that includes future profit predictions would be best.
The three methods of partnership valuation set out below apply to different situations and partnerships in different sectors. In addition, many potential sellers and purchasers rely on expert legal advice regarding the accuracy and suitability of partnership valuations.
Let us explore the three main methods of valuing UK partnerships below.
Income Valuation Method
The starting point for this method focuses on current and future income. Naturally, all references to future income are predictions, which makes this valuation method slightly less accurate. Income valuation considers the following information when trying to predict future income and cash flow accurately:
- current sale figures and pricing;
- predictions as to potential sale figures and price changes over the next few years; and
- any factors that will help or hinder continuous growth in sales and income figures.
In this way, if a partnership sold 10,000 products last year and 20,000 products next year, it might predict similar increases in unit sales over the next three years. As such, this valuation method could provide a reasonable valuation. However, you should take future sales predictions with a pinch of salt. Indeed, the Covid-19 pandemic illustrates how predictions regarding future market conditions are tenuous at best.
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Market Value Approach
The market value approach seeks to compare the partnership to similar businesses in the same industry. For example, a legal partnership in the London area is likely to be compared to legal firms with a similar size, structure and profit figures. Whilst this business value method can compare a partnership to one comparable business, the accuracy of this valuation method will improve with multiple comparators.
You could take an average figure if there are three similar businesses for comparison. Alternatively, the three similar organisations may provide a valuation range, with additional factors (such as client numbers and growth figures) helping decide where to place the partnership.
However, you can see the limitations of this valuation method within niche industries where the partnership is unique. For example, a factory specialising in a unique product in a geographical area with no true rivals will not suit this valuation method.
Asset Valuation Method
This valuation method is best suited for partnerships that own many assets. You would typically divide your assets into physical (tangible) and non-physical (intangible) assets.
Physical assets can include the following:
- machinery;
- vehicles;
- stock;
- land;
- buildings;
- property; and
- other material items.
Non-physical assets include:
- intellectual property;
- trademarks;
- trade secrets; and
- goodwill.
It tends to be harder to value non-physical assets due to their flexible nature (for example, goodwill towards a partnership can quickly increase or decrease).
Note that this approach is one of the more subjective methods. Likewise, different organisations (with slightly different ways of calculating assets) can generate very different valuations. Take caution when using this valuation method if your partnership has few assets. Otherwise, you risk vastly undervaluing your business.
Key Takeaways
There is a straightforward reason why different partnership valuation methods exist: one size does not fit all. Whilst one method will suit a partnership with various assets, another will better serve a growing partnership with predictions of future profit. Choosing the correct valuation method can be the difference between a fair value and a horrendous deal. Accordingly, it is best practice to obtain expert legal and financial advice on accurate valuation methods before committing to a sale figure.
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Frequently Asked Questions
Within a typical limited company, shareholders own the company but appoint directors to run it. Whereas in a partnership, the partners both own and operate the business.
Since valuation methods are no different from most calculation forms, they include subjective elements. This is comparable to obtaining different property values for your home from three different estate agents – they all use a similar system but in slightly different ways.
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