As a majority, equal, or minority shareholder in your business, there may come a time when you need to address a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are certain things to put your focus on that will greatly impact the negotiated agreement, including engaging with 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 in these situations? Proactively addressing these eventualities is never a bad idea and is quite common among rapidly growing businesses that are frequently seeking new investors to manage capital funding requirements and add value.
Is the partner a key contributor to annual revenue whose departure would affect the ongoing success of the business? 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 lack of control and marketability? This topic is commonly debated in valuation assignments, where the shareholder may not have significant decision-making power, and there may also be an inherent difficulty in attracting a new investor given this lesser interest.
Given that these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, the likelihood of a dispute may be high, and could potentially drag out the process, in some cases leading to litigation between the parties. Engaging a certified professional business appraiser will provide an independent, unbiased assessment of value, which will assist in facilitating a fair settlement.
Whatever the situation with your company, when a partner or investor opts to buy out, it will justify the need to formally update the business's value and associated shares so you and any remaining owners can work through this process to a successful conclusion. As a bonus, the additional benefits of an independent appraisal of your business and its underlying assets can go well beyond these immediate concerns and support future growth plans as you forecast your business's future.