Facing a business divorce?

user-gravatar Headshot

Illinois has lowered its commercial distribution fee (CDF) and restored its rolling stock exemption for trucks, repealing much of a law passed last year. HB714, signed into law in September, lowers in stages the CDF, currently calculated as a 36 percent surcharge on truck registrations. The legislation reduces the CDF to 21.5 percent on July 1, 2005, and to 14.35 percent on July 1, 2006. Effective July 1, 2005, truckers will qualify for the rolling stock exemption on truck and trailer sales tax if the truck has a gross vehicle weight of more than 16,000 pounds and is used in interstate commerce for at least 50 percent of its trips or miles. Shipments picked up or delivered outside Illinois qualify for the exemption.

Ohio Turnpike Commission and the state Department of Transportation have adopted the Northern Ohio Freight Plan, which is designed to reduce truck traffic on routes parallel to the Turnpike. Beginning in February, tolls for the heaviest trucks using the Ohio Turnpike will be rolled back to 1982 rates – on a trial basis. The state also is stepping up weight and speed enforcement on alternate routes. An increase in the Turnpike speed limit for trucks, from 55 mph to 65 mph, took effect in September.

Transportation Alliance Bank, a subsidiary of Flying J Inc., now leases trucks and trailers. The program targets small to mid-size truckload carriers. TAB also negotiated extended warranties on critical components in order to maintain the equipment’s long-term residual value, providing an incentive for customers to purchase the equipment at the end of the lease.

If you have one or more partners, you may one day have to consider buying them out. Perhaps a partner wants to relocate or is planning his retirement. Or maybe there are major disputes over company values or business practices. A split can be difficult not only for the partners themselves but also for their families, employees and customers. But don’t let the stress prevent a careful and organized approach to handling important financial issues.

Study the feasibility. Can a buyout be accomplished and the business survive with the remaining partner or partners? Part of the answer depends on what is needed to replace the skills of the departing partner. What will it cost to have these skills replaced if you hired a manager in that role or outsourced those functions? Will the separation be reasonably amiable? Or will it be a tense knockdown, drag-out affair? Avoid a situation that will destroy the business.

Estimate the company’s value. Assuming a breakup survives the feasibility study, one of the toughest tasks often is determining how much money the departing partner will receive for his share. What is the business worth? If there is a written buy-sell agreement, start with the formulas or the valuation procedures in the written agreement.

The owner’s discretionary cash flow, or ODCF, is the basis for some valuation rules of thumb. Often it will be a multiple of earnings before interest, taxes, depreciation and amortization – EBITDA for short. There are also business sales databases of private transactions, which may be helpful. But don’t count on these databases. There aren’t many of them, and differences from business to business make true comparisons truly difficult.

Generally speaking, you are better off obtaining a professional business valuation, such as one performed by a Certified Valuation Analyst (CVA), who will consider all the facts and circumstances involved in a particular business in light of overall industry trends. A business valuation might run from $12,000 to $20,000 for a smaller business, and much more for a large one.

Determine the method of financing. A business valuation will give you a rough idea of how much money will change hands. It’s highly unlikely that you will have the personal cash to buy out a partner in a lump sum, so you will need to finance the transaction somehow. But don’t be surprised if your banker is quite nervous and reluctant to help. Recognize that there is little or no collateral in a stock buy-back situation. Plus, the banker may not have the greatest confidence in the skill set of the remaining partners or may have concerns over the distractions such turmoil causes. For these reasons, you probably should plan on a “seller-financed” deal in which the seller potentially helps guarantee any bank debt taken on to fund part of the buyout.

Negotiate terms. At this stage, it’s best for each side to retain its own legal and tax advisors. The ultimate best deal, however, is one in which you would be just as happy being the buyer as the seller. Believe it or not, some transactions literally are solved by flipping a coin. The winner of the coin toss might get to set the price. But the other party gets to choose to be the buyer or the seller. You get the idea. If you get to set the price but you don’t know if it’s the price you will get for your shares or pay for your partner’s shares, you likely will fix on a pretty fair price.

Not many transactions are solved in such an elegantly simple manner. If prolonged negotiations are proving to be an unhealthy distraction, consider court-supervised mediation or some other alternate dispute resolution. Options vary depending on the laws of your state and your business structure.

Don’t overlook the tax consequences. Despite months of work and thousands spent in consulting and legal fees, a deal can turn sour if you fail to consider the tax implications of a deal before you agree to it. You can’t assume that your payment to a departing partner will be fully tax-deductible. Some of the payment can be – if you structure the buyout and transaction properly.

Commit to an action plan. Once you reach agreement on the outline of a possible deal, the real work begins. A buyout requires a number of tasks – not only in the transaction itself but also in dealing with family, employees and customers – that must be handled carefully and thoroughly. Put these tasks to paper, divide them and conquer.

Whatever your reasons for splitting with your partner, realize that a careful and well-considered strategy will be necessary to make the deal work.

“Breaking up is hard to do: What are your rights when business partners decide to split?” by Neal Jacobs, American Bar Association website.

“Avoiding ‘business divorce’ court: Dissolving business partnerships.” Nation’s Business, July 1991 by Sharon Nelton at this website.