We have 3 members in our LLC (small landscaping co). One wants out. We never set up a buy-sell agreement. Now we're arguing about valuation. I think book value is fair, he wants 3x earnings. What's standard? How do you actually calculate a fair buyout price without hiring a $10k appraiser?
Buyouts
How do you calculate a fair buyout price for an LLC member?
lol welcome to hell. Without an operating agreement clause you're basically in a negotiation, not a calculation. What does your state's LLC act say? Some default to fair market value, some to fair value. Huge difference.
3x earnings is a real number for landscaping if he was a key guy. But if he's just capital, maybe 1.5x. What's he doing now, retiring or starting a competitor?
Oh god we just went through this. Book value is almost always a lowball unless you're liquidating. Your equipment is probably depreciated to nothing on paper. That's not fair to him. But 3x earnings seems high for a small biz with no contracts.
Whatever you do don't let him pick the appraiser.
Realistically: get a mutual appraisal (cost split), agree on a formula (e.g., SDE multiple), and put a cap on it. Also consider a seller note so the company isn't drained. You didn't ask but that's the part that kills these deals.
Wait, fair value vs fair market value. Are those different? Because our attorney threw both around and I still don't get it.
yes different. fair market = what a stranger would pay. fair value = pro rata share without discounts. But honestly for a 3 person LLC the difference evaporates once people start yelling.
Our accountant did an internal calc using EBITDA minus owner comp adjustments. Cost us like $800. Way cheaper than a full appraisal and both sides accepted it. Not perfect but it got us to a number we could argue about instead of just vibes.
OP here. He's not retiring, he's moving to Florida. Equipment is worth more than book value for sure. The EBITDA adjustment idea is helpful. Did your accountant explain the multiple or just hand you a number?
Just make sure you subtract his salary properly. Saw a deal where the guy wanted 3x after his own comp was already baked in. That's double dipping.
and if he refuses to sign a non-compete you should discount the price. He's going to Florida, not dying. Landscaping clients move with relationships.
lol "moving to Florida" = starting a lawn crew in Tampa. Good luck with the discount.