Using a Valuation for a Shareholder Buyout

Shareholder buyouts occur frequently in closely held businesses and often are costly for parties that feel that the payout is unfair – whether too high or too low.

Triggering events for buyouts happen all the time, yet as a business owner they are often not events you spend time thinking about every day. They include:

  • Retirement of a shareholder
  • Shareholder seeking to exit partnership
  • Death of a shareholder
  • Inability to continue working together
  • Shareholder involved in a divorce

They can also be costly if the ownership interests transferred are not valued properly, primarily due to the time and expense associated with litigating shareholder disputes or resolving transactions with the Internal Revenue Service. Even when a buy-sell agreement exists, it may be prudent for the shareholders to engage the services of a trained and accredited valuation professional.

Valuation professionals help mitigate the risks associated with a shareholder buyout by preparing a supportable, well documented valuation report that is based on a well-defined assignment, comprehensive data gathering, and a thorough analysis of the factors affecting the value of the business. The failure to engage a professional to work through valuation leaves the parties involved open to acrimony, drawn out negotiations, and the potential for costly litigation.

Defining the assignment

Confusion and misunderstandings arise in shareholder buyouts when the valuation assignment is not carefully defined between the appraiser and the shareholders for whom the valuation is being prepared.

The most critical aspects of defining the assignment are choosing the appropriate standard of value and properly addressing the impact to value of control and minority interests.

A common standard of value is fair market value, under which a minority interest is valued with the appropriate lack of control and lack of marketability discounts. However, shareholders in a buyout situation may prefer that 100 percent of a company be valued regardless of the ownership interest that will be transferred, since they may be negotiating based on the pro rata value of the entire corporation.

Another standard of value used in shareholder buyouts is fair value, which is commonly used in dissenting shareholder valuations and minority oppression cases. Because fair value is a statutory standard defined by state case law, the business appraiser should further clarify in the engagement letter what discounts will or will not be considered in a valuation under the fair value standard.

Tip: Understanding standards of value is critical, as various discounts for control and marketability can have an enormous impact on the value of the interest appraised.

Gathering the data

Once we have defined the parameters of the assignment the appraiser must gather data, to include both company specific information and industry information. Part of this process normally includes a management interview to both gather data and clarify any of the information provided.

Of concern is access to reliable company data. Depending on the context that the valuation is being performed under, management may have a vested interest in the outcome of the valuation and their answers may be skewed.

A skilled appraiser will determine whether management’s statements makes sense based in context of the company’s within its industry and the market factors that drive the industry.

Analyzing the data

The next step in the appraisal process is for the appraiser to analyze the data gathered and to develop valuation models. An appraiser must ordinarily consider each valuation model or method that is likely to be applicable to the subject company.

Approaches will often include the asset approach involves determining a value indication using the value of the assets of the business less the liabilities. Since the net asset value does not include the intangible value of the company, the asset value will often “set the floor” for any valuation.

The income approach involves ascertaining the value of the future economic benefit stream of the company in today’s dollars. The anticipated benefits are usually based either on historical income statements, adjusted to reflect the ongoing earnings of the business, or forecasted income statements.

Of critical importance is making normalizing adjustments. As small business’ financial statements are often managed to a tax purpose normalizing adjustments are often required to indicate the true economic benefit of ownership. (That being said, minority owners may not always be entitled to such adjustments based on their lack of control. This is a critical point to understand when Defining the Engagement.)

Tip: Normalizing adjustments can have a very large impact on value. Discuss with your valuator if they are appropriate for your situation.

Using the Market Approach, the appraiser will use actual market transactions involving either sales of entire businesses or minority interests. This can provide objective, empirical data for developing value measures that apply to the valuation. This empirical data is critical in valuations for the purpose of shareholder buyouts, because it provides support for values derived under the income approach.

Timing Considerations

Ok, so you get the idea as to how the process works for a shareholder buyout.  But when do you get the valuation?   In our experience shareholders often take a “wait and see” approach, often letting the other party take the lead in pricing discussions.  Negotiating theory tells us that this is a bad move.  But even more importantly, waiting tends to exacerbate the gap between parties – both financially and personally.  More often than not this leads to more strife – which leads to more lawyers, accountants, and valuation folks driving up expense!   With many years working on these matters time and again, we strongly feel that it’s best to be proactive when it comes to getting the valuation completed.


Even if a shareholder does not agree with the opinion of value, the shareholder is less likely to challenge a comprehensive, well documented valuation report by an accredited professional.

When the shareholders involved in a transaction understand and agree with the valuation process, they are more likely to negotiate successful transactions and avoid potentially costly and lengthy litigation.


  • What is the standard of value?
  • Fair Market Value, Fair Value, or something else?
  • What Discounts will be taken? What portion of the business will be valued?
  • Involve your analyst early
  • Insure data discovery is robust
  • Avoid the “wait and see” approach!

Growth: Turn Down for What?

We spend a lot of time talking (and talking, and talking) about revenue trends and earnings trends and successfully selling or exiting from a small business.  A lot of people are going to successfully exit their business.  They’ll do it on their own terms and get a reasonable return for their efforts.  But how do you really knock it out of the park?

I’ll tell you:  you think like these modern kids.  The whippersnappers.  That’s how.  Turn down for what?

The absolute best way to exit a business like a boss is to sell while demonstrating fantastic growth.   The vast majority of companies are sold based on past performance. Consider Company X below.  It’s generated $2 million in EBITDA for the last umpteen years.  So the buyer values it at some multiple (say 5x) of that number, and we all go on our merry way.

Year 1 $2,000,000
Year 2 $2,000,000
Year 3 $2,000,000
Year 4 $2,000,000
Year 5 (Present Day) $2,000,000

But executives and entrepreneurs often want to get compensated for all the sweat and tears that go into getting to that $2 million in EBITDA.  A premium, if you will.  Unfortunately, a buyer can’t afford to pay a premium on this company – it’s a known commodity, earnings are consistent, and there is only so much room for ROI in the valuation.

Now let’s look at company Y:


Here we have a company growing steadily.   In this case the seller has more leverage in convincing the buyer that there is further upside.  The company grows every year! Of COURSE I’m not selling it for 5x last year’s earnings.   We’re going to sell it for at least 5x of next year’s earnings.

But the rate of growth is slowing ($500k is a smaller % growth each year).  So while this is a great profile, it’s not quite Rock Star level.  Check out the chart below:


Now let’s do this one more time.  We want to really crush this exit.  Growing 5ook per year didn’t quite get us there.  The earnings growth on a absolute basis looks pretty, but as the chart below shows us, Company Y’s growth is actually slowing.

{chart= % growth}

Enter Company Z.  Company Z is growing at 30% per year.  So Year of Year, every year in our observable period, the company grows 30%.  What does that do to absolute earnings?  BOOM.  That’s what.

In a company like this, we are much more comfortable basing value on earnings further into the future.  Sticking with a simple multple of earnings, we’re also potentially increasing the earnings multiple.  Why?  Think of this like running a DCF.  Company Z is throwing off a lot more future earnings… which are worth more in todays dollars.

So there you have it. Developing a Company Z is all in the execution, but if you want to exit like a rockstar you have to think like the whippersnapper.  Growth: Turn Down for What??

Final Thoughts

On Playing Offense

“…Whatever Someone Is Willing to Pay”

A phrase we hear pretty frequently is “a business is worth what someone is willing to pay for it.” And of course, this is a true statement. When a business sells… that’s the number.

But the problem with this statement is that it’s reactionary.

Reactionary is bad.

Play Offense

A business valuation enables you to gain an understanding of the most likely value of your business. It is this information that will place you at an advantage when you sit down at the proverbial negotiations table. Consider this – would you start negotiating the price on a house or a car without an understanding of likely value? Probably not. Working with a certified valuation professional arms you with the information and data to both establish value as well as back it up.

Demonstrate Value

One of the things we do when we value a company is to try to ascertain how to value a particular business relative to it’s peers. While we traditionally steer clear of rules of thumb, we’ll indulge for a moment. Let’s assume a Widget Manufacturer should sell for 1x earnings. That’s the average widget manufacturer. Is your company just average? Absolutely not. To get to a more accurate value, we work through a process to dig in and understand why your business is more or less valuable than the market average.

Increase Value

Regardless of method used to value a company, the number one concern for a buyer is their ability to generate profit. Period. The most reliable indicator of this ability is your past performance. But what is often obscured in past performance are items like “non-operational” expenses, one time or unusual expenses, personal expenses run through the business, shareholder perks, etc. We work with you to document those and build them back into the value of your business. This has a direct, significant impact on increasing both actual and perceived value.


Yes, we agree – value is “whatever someone is willing to pay.” But, the idea is to help someone understand why they should pay more. Change the dynamic: play offense, demonstrate value, and increase the value.


SBA Loan Checklist

Getting ready to request an SBA Loan for financing?  Like a lot of things in life, it’s best to go into it being prepared.  That means understanding the SBA Loan Process, and doing all your homework early.

To help you along that path, check out our SBA loan checklist below:

  • SBA Loan Application –: Borrower Information Form – SBA Form 1919
  • Personal Background and Financial Statement – To assess your eligibility, the SBA also requires you complete the following forms:
  • Business Financial Statements – To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
    • Profit and Loss (P&L) Statement – This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
    • Projected Financial Statements – Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
  • Ownership and Affiliations – Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
  • Business Certificate/License – Your original business license or certificate of doing business.   If your business is a corporation, stamp your corporate seal on the SBA loan application form.
  • Loan Application History – Include records of any loans you may have applied for in the past.
  • Income Tax Returns – Include signed personal and business federal income tax returns of your business’ principals for previous three years.
  • Résumés – Include personal résumés for each principal.
  • Business Overview and History – Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
  • Business Lease – Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
  • If You are Purchasing an Existing Business – The following information is needed for purchasing an existing business:
    • Current balance sheet and P&L statement of business to be purchased
    • Previous two years federal income tax returns of the business
    • Proposed Bill of Sale including Terms of Sale
    • Asking price with schedule of inventory, machinery and equipment, furniture and fixtures

Understand Value Now to Avoid an Uncomfortable Retirement

For most entrepreneurs their business is the largest asset that they own.  Further most entrepreneurs have built their company with an eye towards and eventual sale and retirement.  Given these facts, a successful and enjoyable retirement is largely contingent upon the successful sale of the company.

Given the importance of the business in their life plans, it’s critical to rely on more than just the subjective opinion of friends and acquaintances who have sold a business.  Again, it’s likely the largest asset in a portfolio – why leave that to hearsay and chance?

Exit planning ultimately comes down to asking (and answering) one key question: “Can my company be sold for enough money to fund my retirement and lifestyle requirements?”   In many cases the answer is no – but you are now well positioned to attack the problem and position yourself for a successful exit.

What to Do Once You Know Your Value

Involve your deal team.  Selling a business of any size is a significant undertaking.  Ideally you should have an exit planning team of trusted advisors:

  • Valuation Expert
  • CPA / Tax Advisor
  • Financial Planner / Wealth Manager
  • “Improvement” Consultant
  • Business Broker / M&A Intermediary
  • Transaction Attorney

We’re often retained by sellers looking to exit their business immediately.  We can say without exaggeration that its terrible to be the bearer of bad news when current exit plans do not meet current reality.  Getting a team in place early, understanding valuation early, and putting a plan in place is the surest recipe for success when it comes to exit planning and a happy retirement.

Enterprise vs. Personal Goodwill: How they differ and affect divorce valuations

Estimating a value of intangible assets such as goodwill can be highly speculative. This is often a significant point of contention in scenarios involving two parties rallying for a fair market value of a business. We see it all the time in divorce proceedings.

The 101 on Goodwill

Goodwill can be segmented into two categories, enterprise goodwill and personal goodwill. Enterprise goodwill attaches value to specific competitive advantages or differentiators of a company indicating that these factors attribute to the company’s earnings potential. Personal goodwill ties value to an individual’s contribution to a company’s operations such as relationships that are not deemed transferrable upon the absence of said individual. Ultimately, personal goodwill states that there is an element (aka a revenue/earnings stream) that would disappear with the loss of a particular individual.

Each state treats the inclusion or exclusion of personal goodwill as a marital asset differently. Below is a summary of how the country fairs:

  • 19 states include personal goodwill as a marital asset
  • 24 states plus DC exclude it
  • 8 states have no formal precedent

The inclusion or exclusion of goodwill can have material impact on the overall value of a business – which is more than likely a small business owner’s largest asset. However, overstating the valuation with goodwill may base divorce proceedings on a company value that may or may not be realized.

Our advice to business owners (or their spouse) involved in a divorce? Ask your divorce attorney about your state’s treatment of goodwill assets and retain a Certified Valuation Analyst to work with your team in providing a value to one of the largest points of contention during this process.

How M&A Strategy Can Help Mid-tier Government Contractors Scale

Mid-tier contractors face unique challenges competing for federal dollars.  Sized out of small-business preference programs, they must battle large vendors’ hefty BD teams and extensive past performance qualifications. Growing contracts organically is time consuming, requires large amounts of cash upfront, and necessitates niche expertise relating to each contract. As we’ve all seen, the preference for incumbent awards always makes new bids a challenge.  With that in mind- a smart buy-side merger & acquisition strategy can help mid-tier government contractors rapidly growth their businesses and readily compete with large government contractors. Here are seven ways an M&A strategy can help you grow your government contracting operations and business. Read more

EPI Event Recap – On Being Ready to Acquire

Great event this morning!  Much thanks to our moderator Aaron Ghais and panelists Mike Molino, Chris Carpenito, and Ralph Pope this morning.  Loved hearing your insights and war stories as experienced acquirers.

Recapping some of the high points discussed: Read more

Dan Doran OpEd – Washington Business Journal

Quantive’s Dan Doran was recently published in the Washington Business Journal (Paywall).  Dan argues that the IRS’s so-called 2704 proposal will be hugely detrimental to family business ownership.

These regs will make it increasingly difficult to keep businesses and farms in the family – essentially the opposite of the American Dream.

“The IRS has proposed a set of regulations with the intent of limiting certain abuses in tax planning that are often used by the wealthy. They will have a devastating impact on family businesses.”

Read more

Quantive Welcomes New Ops Chief

We’re super happy to have Rob Ratcliffe joining Team Quantive.   Rob joins us after retiring as a career Special Forces officer in the U.S. Army.  His time in the military included various commands (to include a Special Forces A-Team), as well as several years as a strategic planner.   His role at Quantive is simple: help us “Get Things Done.”  His background fits well with our philosophy of “Walk Softly and Execute Relentlessly.”

Suffice it to say he’s over qualified for his role here, and we’re humbled to have him aboard.

Learn more about Rob here.