Legal Question in Business Law in Florida

Re: LLC buyout

First, check your LLC Operating Agreement (sometimes called a "Company Agreement") for buyout terms. They often contain formulas for determining buyout prices.

If it does not (and if you have not entered into any other types of agreements covering this subject), most people use a multiple of annual EBIT (earnings before interest and taxes) or EBITDA (earnings before interest, taxes, depreciation and amortization) which can be determined from your company's financials (Note, there are other means of determining value such as market value of assets, a gross revenue multiple, discounted cash flows, etc., but they are not as widely utilized).

A typical EBITDA calculation for a 50% interest would look something like this:

Net Profit + Interest Paid during the preceding year + Taxes paid during the preceding year + Depreciation deducted during that year + Amortization during the year = EBITDA (on $1.6 million net, this might be around $2.2 million, maybe more).

Many people adjust EBIT/EBITDA for "non-market-value" payments such as rents and salaries that are out of step with typical market rates. This can have significant impact, as any adjustments will be magnified by the amount of the multiple used in determining the value of the business.

If you use a multiple of, say, 5 (this is only an example - see discussion on determining the proper multiple below), the approximate value of your company without adjustments to EBITDA would be $2.2M x 5 = $11 million. Half of that (your 50% interest) would be $5.5 million.

For private companies (and I assume your company is not publicly traded), multiples tend to range from 3 to 7. This can, however, vary widely based on industry, profitability, asset base, location and other characteristics.

This tends to make determination of the multiple the key negotiating point between buyers and sellers.

Talk to a business broker in your industry, or if one isn't available, try to locate data on recent sales of similar businesses (there is a fair amount available on the internet, but it usually takes some digging).

Kind Regards,

James Waite