Typically, shareholder agreements to buy or sell contracts by the majority shareholder is very smart and experienced lawyer and are written totally favorable to the majority shareholder / Corporation. Minority shareholders are required to sign these agreements and often not all the consequences of what they consider to sign it until it is too late. I'll define as too late when they try to leave the company and a liquidity event will receive a value thatfairly close to the value of the company multiplied by its percentage ownership in the company.
There are different approaches that we see used in determining the purchase price for the shares by the selling shareholders. The most common is the book value. What net book value means that all assets and subtract the debt and you get the equity or asset value. To the untrained observer, would seem fair and logical. In reality it is simply an accounting policy --Presentation and generally no relation to what the company is really worth. An example is a company that has a prime piece of real estate for its factory and the neighborhood has become hot. That facility was acquired in 1968 for 2 million U.S. dollars, with half of the value in the building and half of the country. The building has been depreciated up to 400,000 U.S. dollars and the country remains on the books of $ 1 million. A fair market value of the investment is now U.S. $ 8 million but its net book valueValue is recorded at 1.4 million U.S. dollars.
Another weakness in this approach (for the minority) is not the majority shareholders that it placed no value on the going concern or good will. Let's say you are a software company with 300 accounts, installed a cutting edge application and to grow at 30% per year. You could 10 have depreciated server, some used office furniture and virtually any other hard assets. Her book is $ 87,000. The true fair value for the company,according to a strategic buyer who really want to, can this company could be 25 million dollars. The book value is not even in the same zip code as the true value of the company.
Sometimes the parties agree on an approach based on an assessment by a qualified assessment of the company. If you're a minority shareholder, you are beaten before they have even started. Standard assessment practice allows a "lack of marketability discount" of up to 40% and a "lack of control"Until an additional discount of 40%. Say Good Bye, your ability to force the company to give you fair value.
The best way is to allow an assessment formula that will be applied if the agreement is put into effect and can also create a time for ten years in the future. My favorite is an EBITDA multiple. Certainly would be a 4 X EBITDA to establish the value of the entire company and then each shareholder would be able to increase its ownership of the company will receive% times the value. The Companyshould have the opportunity to pay them more than 5 years as the best so that the event did not disrupt the company's capital structure. One note of caution, most small companies do everything to push the results down, which would carry the value of the company with EBITDA. One example is the salaries for the owners and employees in key positions (above the market average) will be a constructive dividend. We use the term normalized EBITDA and EBITDA adjusted to add back about things like salaries, benefits and other holdersExpenditure which is not allowed if the companies the department of a large public company.
I know what you think. I already have one of these agreements in force, a minority shareholder, I will leave the company, and I want for my fair-value shares. If you do not have the evidence in the stomach, and is used mainly by the deep pockets to shareholder oppression action, you are pretty out of luck. We have some approaches that have been developed reasonablysuccessful in improving the outcomes of these unfortunate shareholders, but that the issue of a future article.
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