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Shareholder Buyouts – Valuation or Negotiation?

April 16, 2015

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Smythe Ratcliffe Advisory is engaged on a regular basis to prepare business valuation reports for a variety of reasons, including tax reorganizations, shareholder buyouts, corporate litigation, division of marital property and management buy-ins.

Shareholder buy-outs

Typically there is either no shareholder agreement, or the agreement is silent on how the shares are to be valued or how the departing shareholder will be paid. It is probably safe to say that we are called in because the shareholders have been unable to reach a deal themselves.

Contract negotiation

Business valuation reports are prepared on a notional basis, that is, we attempt to determine the fair market value without actually going to market. As chartered business valuators (CBVs), we look at precedent transactions, public and private industry data, the underlying assets of the company, the prospects for future cash flow, and the risks faced by the industry and business we are valuing. While an imperfect process, an experienced CBV generally does a good job at determining and supporting their fair market value conclusions.

When shareholders need to determine value for a buy-out there is a lot at stake. Further, matters are made worse if the shareholders don’t have a good relationship. When we interview the clients it is sometimes hard to believe that they are talking about the same business, with one saying the business profits will skyrocket and the other warning of potential bankruptcy. You don’t need to think too hard to figure out who wants what.

Ultimately, everyone wants to do a deal, and this requires negotiation. Here are some ideas to ensure a successful process:

  • Have some sort of agreement on what a good outcome would look like, and the process to get there. This needs to happen prior to the negotiation.
  • If you decide that a business valuation will help, arrange a meeting with the CBV. We will advise you on the process of the valuation and provide some guidance on what steps are required to close the deal.
  • We understand that there is a great deal at stake, but try to avoid the temptation to overstate your case. This will slow down the process and makes little difference in the valuation outcome.
  • Once you have the valuation report, do your own evaluation on what is acceptable to you. In the end you might decide to sell the whole business, make or accept a lower offer, or even drop the whole matter. The valuation gives you a starting point from which to negotiate.
  • Keep in mind that deal terms can be as important as the price. With proper planning and good legal advice the vendor can offer financing and still protect themselves.
  • A CBV can help you design an appropriate capital structure and liaise with your bank, or other sources of financing such as BDC or First West Capital.

We all know that a valuation is important. However, just as important is a properly managed negotiation. While winning is good, completing a fair deal is even better.

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