How to value a partner’s share in a buyout or exit

When a partner leaves or you buy out their share, the first question is how much it is worth. The answer is not "the business value times the percentage". The price of a share depends on what that share actually gives its holder.

Share value vs business value

The business is valued as a whole first, then the share is applied. Adjustments often follow. A share that gives no control usually costs less than its proportional part, because it cannot steer the company. A share that is hard to sell to a third party also gets a discount for limited liquidity. The size of the discounts depends on the agreements and documents, so there are no universal figures.

What drives the price of a share

• the founding documents and the agreement between the owners: pre-emption rights, buyout formulas, restrictions on sale;
• control: 51% and 20% behave differently because they give different rights over decisions;
• the partner’s role in the business: if they hold the clients or key expertise, their exit lowers the value of the business itself;
• debts, guarantees and loans from the owners;
• retained profit and the dividend policy.

How the price is usually agreed

• one valuation by a method both sides trust;
• two independent valuations and the average between them;
• a formula from the shareholders’ agreement, for example a multiple of profit, if there is one;
• a payment schedule and security for it, so the buyout does not drain working capital.

Common mistakes

• arguing about the number before agreeing on the method;
• forgetting debts and obligations to the partner;
• not handing over clients and know-how before the last payment;
• not documenting the exit and not closing it in the registers.