Business Valuation Blog | Understanding Buying / Selling a Company

Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? Maybe you need to add equity for a serious expansion but aren't sure about how the valuation of a company will affect the share cost. You could be adding new partners who will help build your business but don't know what the share value will actually end up being. When you're adding additional shareholders to your business, you probably have a lot of questions about how much each share will be worth. A business appraisal helps you know your business' true value so you can pass that cost onto your new shareholders.

How Business Valuation Helps when Adding Additional Shareholders

• Assures the existing shareholders of their shares' value. When you add shareholders to a company, your existing shares will be diluted as the new shareholders increase the number of shares in your company. That means your existing shareholders will want proof of the existing value of the business so they know they won't be losing money during the sale of new shares. As an example of this, having 100 shares in your company distribute among two partners means each partner has a half interest in the company. If you're adding two partners and 100 additional shares, suddenly each partner has a quarter share in the business instead.
• Provides a basis for pricing new shares. If you're selling shares, you'll need to determine a price for the shares. How can you accomplish that if you're not sure of the value of your business? By having a company appraisal performed, you can determine the current value of your company before you try to price the shares.
• Provides documentation for new shareholders. When you're adding shareholders, whether as a sale of shares to raise equity or providing a new partner with shares in lieu of cash payment, the shareholders will want documentation so they know what each share is worth. If you can't document the value, how would the new shareholder know that the share is worth the paper it's printed on?
• Ensures you're not undervaluing or overvaluing your shares. Far too many businesses base their business value on a tax return or a balance sheet that may not reflect accurate business values. In tax accounting, assets are often depreciated by having their value distributed across a standardized depreciation table that spans a particular period of time. What if your equipment is worth more or less than its depreciated value at that time? At the same time, basing your business value on the sale price of similar businesses in your area may not reflect an accurate value either. A proper business appraisal will.

Adding additional shareholders to your company can be stressful, so don't make it any more stressful than it needs to be. By having a company valuation performed to determine the value of the shares, you have easy documentation for your shareholders both prior to and after the addition to verify the sale and cost of shares. If you haven't had business valuations performed on your company recently and need one done to add shareholders, it's important that you get that documentation.

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.