Partner Buy Out – is 50/50 fair?

Reply to the comment left by "DARREN SMITH" at "14/01/2015 - 11:39":

Darren, I am of the opinion that if in doubt and you want to maintain good relations then just split the difference 50/50.

So why don't you calculate the proceeds as if it where sold to the public and the proceeds after transfer costs to you and meet in the middle. That seems fare to me.

Now you just need to work out all the figures!

Darren,
It is always better to have the whole story ....

But I reiterate what I have said. The only discount to the 'estate agent asking price' would be that in current market conditions. Only the estate agents can tell you that. Actual recent sales that you can access will be at least 3 months out of date if not 6 months. In other words you probably asked the estate agents the wrong question .... Unless they said we would market the house at x and expect in current market conditions to achieve y.

Why did you not do a survey and valuation from a recognised surveyor?

I would not take into account anything else other than any third party transaction costs such as solicitor and valuer fees.

One final point. As this transaction will be scrutinized by HMRC as a 'related party transaction', any valuation has to be agreed by HMRC (or to be precise the district valuer). In practice you declare the valuation basis and HMRC will think about it. HMRC would probably go with my view as that would derive the higher price ... Just a thought. And this applies irrespective of whether any CGT is due because of allowances.

Darren,
Let’s look at this another way....
If you do come up with a complex algorithm that factors in a number of academic variables to establish (what will invariably be less than) the 50:50 split, and then your partner comes back and says “ I tell you what mate, I’ve had a change of heart. I’ll give you the sum you offered me and buy you out instead” what would you do then? Honestly??
In my view, you’ve had an amicable relationship and your partner’s 50% stake has helped you out in the venture. I assume you are making a gain on the value from purchase, and you will no doubt make an incremental gain on this property in the days to come. Don’t leave a bad taste in the mouth by penny pinching on the exit. If you do then I predict you will fall out, if not now but by setting such precedents at sometime in the future on another deal.
Why not just give your partner the full 50% of the true value. I would suggest that your partner’s investment stake also has a value (and they could reasonably argue the 'cost of money' and discount that value back over the years their investment has been in place and factor that into the equation).
My advice, don't make it more complicated than it needs to be. Bite the bullet, pay them off in full do some more deals in the future and sleep well…

Reply to the comment left by "Claudio Valentini" at "14/01/2015 - 16:45":

You are quite right Claudio, but if Darren's partner wants 50% then then Darren can say, "I tell you what mate, you can buy ME out for 50% and I'LL save on the sale costs". It works both ways.

Future gains are not yet realised, who ever has the money left in takes all the risk and all the reward for all money being tied up.

It's true the partners money has enabled the original purchase to take place and there is value in that but he is a silent partner and presumably Darren has done most of the leg work which also has value. These aspects are very hard to quantify financially.

Darren, do your homework on the figures, propose a deal using your figures to back you up, be prepared to compromise and meet your partner half way, maintain a good relationship that not only allows you to sleep at night but to be able to do more deals in the future. The project is in profit so It should be a win/win outcome.

How did you split the purchase costs? That might give you an insight on how to split the sale costs!

Is there a mortgage? If so you will probably have to remortgage. Either way you say this is a 50/50 split. The costs of THIS transaction should be split equally including any CGT. This is you buying them out. What happens in future is then yours alone. After all you may make a further profit or loss which cannot be predicted. If in doubt, solicitors or surveyors can advise you. If you want to be absolutely fair, sell it and you buy another with your share of the proceeds. If this was a relationship breakdown and one partner was remaining they would not be able to claim possible future costs. You can't have it both ways!

I guess the real lesson here is to agree these details at the start of the JV, not at the end.