How should we price a shareholder buyout?

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A natural buyer of a shareholder's stock is either the business itself or the other shareholder(s).

Frequently, shareholder buy-outs are addressed in a company's Operating Agreement or in a separate Buy-Sell Agreement. Too often, though, the specific provisions of the agreement that pertain to how the purchase price is set are vague. Formulas are subject to interpretation. We recommend that your agreement provide for a credentialed appraiser to quantify the buy-sell price, because an independent, qualified party can consider ALL the relevant factors, and manipulation can be avoided.

If you already have an agreement, or are in the process of drafting one, review the EXACT wording pertaining to price. Most agreements we see have language that is difficult to interpret. Appraisal language is specific, and certain words mean certain things. For instance, fair market value frequently includes consideration of discounts for lack of control and lack of marketability. What this means to a minority shareholder is that the value of the ownership interest in the company will be discounted. If that is not the intent, then specifically say this.

Otherwise, you will be calling us to serve as part of a litigation team. We have been involved in MANY shareholder disputes involving millions of dollars…all of which could have been avoided through a carefully drafted document.

If you are in the unfortunate position of approaching litigation over this matter, there are several things you should consider. Have an appraiser review the provisions of your agreement to identify any areas that pertain to pricing. Understand the issues at hand. And, finally, ask an attorney for guidance on what the laws are in your state pertaining to minority shareholders. Some states specifically provide for no discounts, while others mandate them.

Strategic Valuation Group routinely partners with your legal team in the drafting stage of Shareholder Agreements to ensure that the intent of the parties is preserved.