The valuation of shares is another area where formerly cordial relationships between business partners can become awkward, so it pays to have an agreed mechanism for the valuation of shares prepared in advance of any difficulties. The Shareholder Agreement is a good place to detail who will carry out the valuation and what method they will use.
There are as many different ways of valuing a private company as there are companies (about 4 million in the UK alone), but ultimately the price paid will be what it is worth to the buyer to acquire the shares. This can be influenced by many different factors: the company’s asset value; its revenues; the proportion of the company’s share capital up for sale (a minority share will have minimal influence, so may be less appealing); and even the actions of the seller – if they agree not to compete with the company in the future they can help to increase the share value.
For reasons of convenience, share valuation will usually be handled by the company’s accountant, although if the company accountant happens to be the close friend of one of the shareholders then for reasons of perceived independence the business partners may prefer to bring in an outsider to carry out share valuation. Many accountants specialise in the valuations of private company shares, so it shouldn’t be too hard to find an affordable option.
It is a very good idea to provide a formula in the Shareholder Agreement to help the person valuing the shares. This can create an internal market valuation mechanism for the shares and may avoid lengthy disputes about whether the valuation obtained from the company accountant is fair or accurate.