Valuation of Minority Equity - Partnerships

One question that is often thought but rarely asked is ‘Should the Junior Partner pay a premium for the funding into a business they could otherwise not have afforded?’ Maybe yes maybe no. That’s a debate for another time. My next article perhaps. Also who is going to protect these young pharmacists from the opportunistic wolves out there? (I know generally Pharmacists are upstanding characters). Alternatively it sometimes the good hearted senior partners that sometimes need protecting.

Generally speaking, where control is not available to the purchaser (i.e. where you are buying less than 50% share in the business), minority stakes are discounted. That is, the value of the minority interest is less than the proportionate share of the total business value. For example, if you were buying a 40% share, the value would be less than 40% of the total business value.

However, this discounting has not been common in the sale of pharmacy partnerships. Indeed, given the assistance with funding a premium may be warranted.

From the above example it is apparent that a junior partner, in some instances, can purchase his or her share in the business with little or no cash contribution.

We have a client who is now into their fourth generation of succession planning. The senior partner progressively selling down to an incoming partner(s). These incoming partners later became the senior partner. This pharmacy is now into its fourth iteration of this process. That is, the transition of ownership has occurred four times.