
Ask HN: Fair buyout price for my partner? - buyingout
I'm using a shadow account but I've been a member of HN for a while. My partner has asked me to buy him out of our business, and we're trying to come up with a fair buy out price.<p>Details:<p>- launched an app mid 2010 with a partner (50 / 50 split, not incorporated, no contract)
- this year, gross revenue is $21,948
- net revenue, after income taxes taken off for 2011 will be $17,558
- i'm the designer + idea guy
- he's the coder
- equal time contributions so far (we'd both agree)
- he'd like to keep 5% share and be an advisor<p>What do you think is a fair price? We're on good terms, no disagreements, everything's cool. What's fair?
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relaunched
This is a common and interesting situation, so here are my thoughts.

1) If he wants to be bought out in cash & wants to stay on as an advisor
(won't be doing product updates, coding tweaks, etc.), I'd look at sales
trajectory of the app he worked on overtime. If it's trending down, it's okay
to make an assumption that it will continue to do so, at some reasonable rate,
an calculate the present value of projected future earnings / 2, assuming that
you won't make any product changes. There is nothing wrong with keeping him on
-on a rev share basis, but be sure you know what you are getting.

If he doesn't want a cash up-front buyout and just wants nothing to do with
the app anymore, just keep his 50% share alive up until a max of the agreed
upon future earnings of the app, as is.

However, if you are planning on keeping the app going, any agreement has to
codify the terms of your relationship, contingent on accepting the buyout
(consult an attorney). Who knows where things will go in the future and who
else you will be bringing on-board.

If you are on good terms, coming up with a number shouldn't be a big deal.
Especially, if he has a specific need for the money. If not, this might be the
time to incorporate your venture, issue him some stock for contributions thus
far and let him participate in whatever upside there may be.

Good luck,

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buyingout
thanks for the detailed reply! he does indeed want a cash payment for his side
of the business.

quick question:

when projecting future earnings, what time period is fair to assume?

the business has been steadily chugging along, growing some months, shrinking
some months. we both planned to invest more time into it, but have been busy.
the idea is that if i own most of it, then i'll have more incentive to invest
new features into it.

~~~
relaunched
I've heard that, "you know a deal is fair when neither party is happy". Which
is to day, I have no idea.

Maybe 1/2 average rev from latest sales trend period x 12 months. I commend
you on trying to be fair, b/c most deals don't happen that way.

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chris_dcosta
There are a number of things your need to consider, not least that without a
contract if your thing hits big time he'll want his 5%, and it'll be
worthless.

What I'm trying to say is that a notional 5% is actually worth nothing unless
you have some form of company set-up.

Here's where it starts to get tricky, because the set-up costs of the company
are something that both of you should carry equally even if he's leaving. At
the end of that process you'll have a value for each share based on the actual
worth of the company. I'm not sure what the rules are in the states (or
wherever you are) but in the UK at least the company is worth the sum of it's
assets, at the start of it.

He'll be selling you 45% of his 50%, but you'll find that the sum of the
assets to be far lower than the 17K that you have now. You may also want to
consider what type of shareholding he has and what are his options for selling
the 5% to someone else. That's just the tip of the iceberg of possibilities.

What you might be able to do, is agree a smaller payment now with a larger
payment should the company meet certain targets, and nothing if it doesn't.
That might give your partner the feeling that he still can benefit, and it
gives you the flexibility to take control.

Honestly speaking the legal and accountancy fees in setting this whole thing
up may just eat into the whole budget.

EDIT: On reflection, you could just say "here's 10K (if you're feeling
generous) for your 50%, I'll set up a company worth 100 dollars that owns
everything and give you 5% for which you pay 5 dollars."

Let us know how it turns out!

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jellicle
You make an offer, he can either take it OR he can pay you that price and buy
you out of the business. Sign an agreement to that effect before you make the
offer.

Thus, you will offer enough that if he decides to buy you out, you'll be
satisfied with the amount. This is the fair price. You cut the cake, he gets
to choose which half to take.

~~~
buyingout
this sounds like a fair approach - a shotgun clause right? i feel emotionally
invested in the product since it was my idea, but he put a bunch of time into
it and we both believe in it.

~~~
afdssfda
"i feel emotionally invested in the product since it was my idea, but he put a
bunch of time into it"

Ideas often aren't worth as much as execution.

~~~
buyingout
we've both contributed equal time to it, using our different skills. he's
written more of the code, but the designs are mostly mine, and i've done all
the research into advertising, CTR, managed our intern, and done the biz
admin.

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md1515
The buyout depends on the method in which you make your money. If you make
money on advertising you have to make sure your users are as engaged as they
have been since your launch (this often doesn't happen if it is a short game
or you don't add features etc).

If you make money on app purchases then you need to be careful that you
continue to have as many users buying it.

If it is in-app purchases then you need to make sure that features are
promoting users to purchase.

Anyway, you probably know all that - the point is, you have to realistically
forecast your revenue projections for the next few years. IF you think you can
make the same amount then it is not a big deal to buy out for 2x his share of
revenue (so $17K). If it looks like projections for next year will be $10,000
you need to seriously consider the offer. Good luck

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huhtenberg
One common option to valuate the company is to take its estimated 5 year
revenue. In your case, assuming 20% YoY growth it works out to 141K (20K + 24K
+ 29K + 35K + 41K), 45% stake buyout -> 67K.

YMMV, etc.

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staunch
Maybe he takes the $17k and keeps 5% and you get 95% of the future?

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afdssfda
How about 50% of valuation - valuation of his 5% share?

Not sure the best way to get business valuation is an online form... but
here's one: <http://www.caycon.com/valuation.php>

:)

