Business valuation for buy–sell agreements and shareholder exits
Read the deed before valuing anything. A buy–sell agreement or shareholders’ agreement usually prescribes the standard of value, the valuation date and whether a minority discount applies — and those terms override what either party assumes is fair.
Most shareholder disputes we are engaged in are not really about the number. They are about a mechanism nobody read when it was signed: a formula that no longer makes sense, a valuation date that favours one side, or a silence the parties now interpret differently.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
The departing party, the continuing parties and their lawyers — and, where the deed provides for it, an expert determiner or a court.
Whatever the deed prescribes. Where it is silent, fair market value for the interest being transferred.
The date specified in the deed — commonly the trigger event, not the date the dispute became apparent.
What the report must contain for this purpose
- The deed’s valuation provisions, quoted and applied
- The interest being valued, defined precisely as a parcel and a percentage
- Whether control or minority applies, and on what basis
- Any discount for lack of marketability, with reasoning rather than convention
- Related-party arrangements between the parties, normalised out
- The valuer’s independence from both sides, stated
Sequence
How a shareholder exit valuation runs
The deed drives the engagement. Everything else follows from what it says — and from what it fails to say.
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01
Read the agreement
Standard of value, valuation date, who appoints the valuer, whether discounts apply, and whether the determination is binding. This is done before any financial work starts.
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02
Confirm the appointment
Jointly by the parties, by one party, or by a nominating body under the deed. The basis of appointment is recorded and disclosed in the report.
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03
Value the whole, then the parcel
The business is valued as a whole, then the specific interest is assessed — because a 25 per cent parcel is not automatically a quarter of the company.
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04
Report and, where required, determine
A report to the deed’s terms. Where the deed provides for expert determination, the process and the parties’ submissions are addressed explicitly.
Where it goes wrong
Where buy–sell valuations come unstuck
Most of these are drafting problems that only become visible when someone tries to leave.
The cheapest time to fix this
A valuation mechanism reviewed while everyone is getting along costs very little. The same question resolved during a dispute costs legal fees on both sides, an expert determination and often a damaged business. If your deed has never been tested, have it read now.
- A formula in the deed that no longer works Fixed multiples and net-asset formulas agreed a decade ago frequently produce results neither party would now accept — but they may still be binding.
- Silence on discounts Whether a minority discount applies can change the answer by 20 to 40 per cent. If the deed does not address it, both sides will have a firm view and they will not be the same view.
- The wrong valuation date A trigger event, a notice date and a completion date may be months apart. In a business that has moved, the choice of date is worth more than the methodology.
- Related-party arrangements left in Where one shareholder’s entity charges the company rent or fees, reported earnings are distorted in that party’s favour. Normalising it is often contested and always necessary.
- Appointing a valuer who has advised one side A valuer who has acted for the company or one shareholder invites a challenge to the whole determination. Independence has to be real and stated.
What we need
Documents for this engagement
The governing documents come first. The financial information follows once we know what the deed requires us to value.
Open the standard checklist →- Shareholders’ or partnership agreement Including any buy–sell, deed of adherence or side agreements
- Company constitution or trust deed Rights attaching to each class of interest
- Financial statements — three to five years For every entity in the structure
- Share register and cap table Who holds what, and since when
- Related-party arrangements Loans, leases, service fees and drawings between the parties
- The trigger event documents Notice, resignation, death, incapacity or default as applicable
Questions
Shareholder exit valuations, answered
Broader questions are on the full FAQ page.
Ask a valuerIt depends first on the deed and then on the facts. Where the agreement is silent, a non-controlling parcel in a private company ordinarily attracts a discount for lack of control and often one for lack of marketability, because the holder cannot direct the company and cannot readily sell. Where the deed prescribes a proportionate share of whole-of-business value, that overrides the general position.
The deed usually says. Some provide for joint appointment, some for appointment by a nominating body such as an accounting or valuation institute, and some are silent — which frequently becomes the first thing in dispute. We accept appointment on any of those bases and disclose the basis in the report.
Where the deed provides for expert determination, the outcome is generally binding subject to the limited grounds the deed or the law allows. Where it does not, the valuation is evidence in a negotiation or a proceeding, and a genuine factual error — a document not provided, an asset misvalued — will be corrected on the evidence.
Often yes, because the formula usually needs inputs that themselves require valuation — net tangible assets at market, maintainable earnings, or a defined earnings figure. And where the formula produces a plainly commercial absurdity, the parties frequently agree to depart from it, which needs an independent number to depart to.
Yes. A baseline valuation and a reviewed mechanism, done while nobody is leaving, is one of the highest-return governance exercises available to a private company. It is also considerably cheaper than the alternative.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
Last reviewed
Value the interest the deed actually describes.
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