How is a shareholder buyout valued in an engineering or manufacturing company?

What is the difference between a minority and a controlling interest?

Control is the power to run the company: to set strategy and salaries, decide what is spent on new plant, declare dividends, and sell the business. A shareholder with control can do those things; a minority shareholder usually cannot, and shares in a private company are hard to sell to an outsider. For those reasons a minority parcel can be worth less per share than its straight percentage of the whole company.

Two separate adjustments are usually discussed: one for lack of control, and one for lack of marketability. Whether either applies, and how large it should be, depends on the facts and the purpose. An equal two-way split is a special case, because each holder can block the other without controlling the company.

When is a straight share of the whole the right answer?

When the agreement says so. Many shareholders agreements and constitutions define the price for a departing shareholder, for example as a proportion of the value of the whole company with no discount, or as fair value determined by an independent valuer. The valuer follows the defined basis, even if it differs from market value, and the report says which basis was used.

Where the agreement is silent, the purpose matters. In a buyout between founders who built the company together and shared the management, the parties often agree on a pro rata basis. A sale of a small parcel to an outside investor is more likely to reflect the limits of a minority holding. Our article on valuing a minority shareholding works through these cases.

What changes when the departing shareholder runs the workshop?

• Their salary. Earnings are normalised so the role is costed at what it would take to employ someone to do it, whatever the shareholder actually drew.
• Their knowledge. If the departing owner is the chief engineer, the estimator or the person customers call, the company may be worth less after they leave unless handover and restraint terms protect it.
• Drawings and designs. Whether the product designs, drawings and processes belong to the company or to an individual, and whether they are properly documented.
• Assets in personal names. Machinery, vehicles or premises owned personally or through a related entity and used by the company.
• Loan accounts. Amounts owed to or by the shareholder are usually settled separately from the share price.

How do the shareholders get to an agreed figure?

The cleanest route is to instruct one independent valuer jointly, with the basis, the date and the interest being valued agreed in writing first. If the shareholders are already in dispute, the work becomes an independent expert or dispute valuation. Dispute work: Quoted individually. A report prepared for a commercial purpose is not a court expert report; court work is a separate engagement. See shareholder valuations and dispute valuations, or request a quote. We confirm the fee in writing before we start. No hourly billing.