If you have a partner who is looking to leave or is considering bringing in another investor into your small business, you will want to negotiate a fair buyout or buy-in with those involved to avoid a dispute. As certified appraisers, we see many instances in which the process has dragged on for months with no agreement, due in large part to the fact that the parties on each side of the transaction cannot reasonably agree on price.
There’s a lot at stake when valuing ownership shares amid the exit or new entry of investors, and it is common for different perspectives on value to become a sticking point. Before you enter into your first serious conversation about value, you should engage with a professional appraiser who can provide an independent, unbiased opinion of the value of the company as well as the percentage ownership share involved. They will work closely with you to gather the data needed to understand and analyze your business's financial details, while researching the specific industry and market in which you operate. You will have an ongoing open line of communication with the valuation expert to highlight 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 frequent areas of dispute in these negotiations is whether to apply discounts to minority ownership interests and, if so, the level of those discounts. This approach may be appropriate if the ownership is considered non-controlling, which typically involves a share of less than 50%. These discounts reflect the lack of control a shareholder would have over the company's operational decision-making, as well as a reduced ability to sell their shares in the market to a third party due to the non-controlling interest.
It will be important to discuss all these topics during the appraisal analysis with your valuation professional, so everyone is on the same page regarding the underlying factors that will affect the value of your company and its associated shares.
To avoid wasting time in the negotiating process and reduce the chances of a serious dispute or even 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 begin settlement discussions from a non-contentious point, greatly increasing the odds of an amicable transaction.
Remember to do this early in the process to firmly establish the ground rules and maintain a level of control over the process. As a business owner, the end result will impact you more than anyone else involved.