Business Valuation Blog | Understanding Buying / Selling a Company

If you share ownership or are considering bringing another investor or partner into your small business, you will want to negotiate a fair buyout or buy-in with those involved to avoid a messy dispute. As certified appraisers, we see so many instances where the process has dragged on for months with no agreement due in large part to the fact that the parties on each side of a transaction cannot reasonably agree on a price.

There’s a lot at stake when dealing with the exit or new entry of investors when ownership shares are being allocated, and it is simply human nature that different perspectives on value will come into play. Before you even enter into your first serious conversation about value, you should engage with an independent, unbiased, professional appraiser who can provide a balanced view of the value of the company and the percentage ownership share involved. They will work closely with you to gather the data necessary to understand the financial details of your business and research the specific industry and market in which you operate. You will have an ongoing open line of communication with the valuation expert to point out any nuances and adjustments that need to be considered with your business while providing further insight that isn’t readily apparent from the income statements and balance sheets.

One of the more common areas where disputes arise is whether or not to apply discounts to minority ownership interests. This methodology may be appropriate if the ownership is considered non-controlling, which typically involves a share percentage of less than 50%. These discounts reflect the lack of control a shareholder would have in the operational decision-making of the company as well as a lesser ability to sell their shares in the market to a third party as a result of the minority interest.

It will be important to discuss all these topics during the course of the appraisal analysis with your preferred valuation professional so everyone is on the same page with the underlying factors that will affect the worth of your company and the associated shares.

To avoid wasting a lot of time in the negotiating process and reduce the chances of a serious dispute that ends up becoming a legal battle, advise the parties involved that you will be engaging with a certified appraiser to conduct an independent valuation of the business and the percentage shares involved with the buy-in or buyout. Once the report is delivered, you can share the results and start the settlement discussions from a point of non-contention, which greatly increases the odds of an amicable transaction.

As a majority owner or equal partner in your business, there may come a time when you need to settle a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are a few things to focus on that will impact the agreement and it is common to look for guidance and assistance, including the engagement of a certified valuation professional.

Does your company have an internally developed buy-in/buyout or another type of operating agreement that lays the groundwork for assessing value when these situations occur? Proactively handling these eventualities is never a bad idea and is quite common for rapidly growing businesses that are frequently looking for new investors to manage capital funding requirements and add value.

Is the partner or minority shareholder a key contributor to annual revenue? If so, is there a non-compete agreement in place to buffer the effects of this departure in the short term? If not, should the company be valued with the anticipated losses in sales or is there a mutually agreeable arrangement to replace the partner and offset this reduction?

If the investor is buying out of a minority interest, should discounts be applied to reflect the value of his or her shares in relation to majority ownership? This topic is commonly debated in valuation assignments where the shareholder may not have the same level of control as a larger investor, or it would be more difficult to attract a replacement given the lesser interest.

Given these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, a dispute may ensue which may drag out the process and even lead to litigation between the parties. Engaging with a certified professional business appraiser will provide an independent, unbiased assessment of value which will hopefully facilitate a fair settlement.

In any case, when a minority owner or partner opts to buy out, it may warrant the need to formally update the value of the business and associated shares so you and any remaining investors can better understand the overall current status of the company. The benefits of having an independent appraisal of your business and the underlying assets can go well beyond these immediate concerns such as assisting with future growth plans and reviewing your tax and accounting requirements.

When a business is started, one common way to raise capital is by selling shares in the business or offering shares as part of a compensation package to help secure a talented individual for your company. But what happens when a shareholder wants to leave the business? If you want to retain control of the company, you'll need to buy out their shares. How do you know what a good price is for the shares? One of the best ways to approach this problem is through the valuation of a company. Let's take a good look at how a business valuation can help determine price when buying out an exiting shareholder.

Buying Out an Exiting Shareholder: Using a Business Appraisal to Reach a Fair Agreement

However the situation has come about, when one shareholder wants to leave a business, you want to ensure you can control those shares. But what value do those shares have? How do you determine a fair price? The shares may have had a particular value when you opened your company, but as your company has grown and changed, it's become more difficult to put an exact figure on the shares. To determine their value, you need to know your company's appraised value. But how is that figure determined? You could base the value on the sale of similar businesses in your area, but those businesses often have many differences that make it difficult to compare...and are the rumors of what the business sold for real or a bunch of B.S.?  In this situation, many companies use business valuations to determine a fair price for a share buy out.

Exiting shareholders are bought out for a wide range of reasons. Sometimes it's a good one, because they're retiring or moving to a great new location, and you want to make sure that they're getting their fair share of the equity in the business to ensure they do well in their new situation. Sometimes you're dealing with a difficult situation, where the split is on bad terms, such as partners not getting along, differences in vision for the short-term and long-term goals of the company, differences in your work ethic, divorce, or similar issues. The exiting shareholder in this situation may be demanding a share price you feel is too high for the business to reasonably bear. Anytime there are multiple owners in a business, it's wise to have a buy/sell agreement in place ahead of time to plan for these types of unforeseen events. That way, everyone knows ahead of time what the policy is and agrees on how the valuation of the business is to be handled in these situations.

When you know what your company's shares are worth, you know you're making a fair offer instead of worrying about whether you're overpaying or stripping the business of the vital capital needed to remain in operation.  Business appraisals are a great way to determine value when buying out an exiting shareholder in your company. It also gives you a baseline tool for many other business purposes, which you can read about in our other blog posts.