Shareholder valuations for industrial companies

What does your shareholders agreement say about value?

Before we value anything, we read the documents. Many industrial companies run on a shareholders agreement drafted from a template when the business had one CNC machine and two customers. It may say the departing shareholder's shares are to be bought at "fair value as determined by the company's accountant", at market value "without any discount", or by a formula such as a multiple of average profit or net assets that nobody has revisited since the company tripled its turnover. Whatever it says, it usually decides more of the final number than any valuation method does.

The clauses we look for:

• Trigger events. Resignation, retirement, death, incapacity, breach, deadlock, or a good leaver and bad leaver distinction with different prices for each.
• Basis of value. Market value, fair value, a defined formula, or a price agreed each year and recorded in the minutes.
• Minority discount. Whether the shares are valued as a pro rata share of the whole company or as the parcel they are.
• Valuation date. The date of the trigger notice, the last balance date, or the date of the valuation itself.
• Who values and how. Whether a named valuer, or one chosen by a professional body, acts as an expert and not as an arbitrator, and whether the result is final.
• Funding. Whether a buy-sell agreement backed by life and disability insurance funds the purchase, and how old the sum insured is.

Where the wording is ambiguous, your lawyer interprets it. We value to the definition as instructed and state our reading of it in the report, so any disagreement about meaning is visible rather than buried in the number.

Is a minority interest worth its share of the whole company?

On a market value basis, often not. A 25% holder in a private industrial company cannot set dividends, approve a new press line, choose the managing director or sell the company. There is also no ready market for the shares: the realistic buyers are the other shareholders. A hypothetical buyer would pay less for that parcel than a quarter of what the whole company would sell for, and the difference is the discount for lack of control and marketability.

Many founders deliberately remove the discount in their agreement, so that each holder receives a pro rata share of the whole. That is a reasonable commercial choice, and we apply it when the agreement says so. Where the agreement is silent and the parties are negotiating, the discount is a real point of difference and we set out the reasoning on both sides. Our article on valuing a minority shareholding in an industrial business goes further into how discounts are assessed.

What if the departing shareholder is the chief engineer?

Industrial companies are often built by a technical founder: the person who designed the product, set up the tooling, signs off welding procedures or engineering certificates, and holds the technical relationships with the customer's engineers. When that person leaves, the company is usually worth less the next day than it was the day before. The valuation question is who bears that loss: the departing shareholder through a lower price, or the remaining shareholders who keep a company without its engineer.

Three things decide it. The valuation date in the agreement, because a value struck before the departure includes the engineer and one struck after does not. Whether the company owns the intellectual property: drawings, CAD models, firmware, process settings and recipes that sit on the engineer's laptop or in their head are worth checking before anyone signs. And what the departing shareholder will do next: a restraint, a handover period or a paid consulting agreement can keep much of the value in the business.

How do buy-sell agreements and insurance interact with value?

Many industrial owner groups fund a buy-out on death or disability through life insurance under a buy-sell agreement. The trouble is that the sum insured is usually set once and forgotten. A company that has since won a long-term supply contract or bought a second site may be worth several times the cover, leaving the surviving owners to find the difference or the family of the deceased owner short. A current valuation gives the insurance adviser and the lawyers a figure to reset the cover and, if the agreement uses one, to check the formula. We provide the value; we do not advise on insurance.

What happens if the shareholders cannot agree?

If the agreement provides for an independent valuer to determine the price, we can be appointed as that expert where we are independent of both sides. If it does not, or a shareholder alleges the company's affairs are being run against them, the dispute may go to court. Under section 232 of the Corporations Act 2001 (Cth) a court can act where conduct is oppressive, unfairly prejudicial or unfairly discriminatory against a member, and section 233 lets it order, among other things, the purchase of a member's shares. The court then needs valuation evidence. That is expert work under the court's rules, quoted individually; see dispute valuations.

What do we need to value a shareholding?

• The constitution, the shareholders agreement and any amendments or side letters.
• The share register or a current company extract, and any earlier share transfers or offers.
• Financial statements for the last three years and current year-to-date accounts.
• Loan accounts between each shareholder and the company, and any related-party arrangements, such as the factory owned by one shareholder's family trust.
• Each shareholder's role, hours and pay, so their work can be costed at market.
• Customer, plant and staff information we would need for any industrial valuation.

Documents come through the private upload link on your matter, never by email. Your information stays confidential, and where shareholders are in conflict we agree at the start who instructs us and who receives the report.

What does a shareholder valuation cost?

We value the company first and then the interest, so the fee follows the company's turnover; the bands are in the fee table below and on our pricing page. Two extras are common in a shareholder exit. Shares held through a holding company add $795 + GST per additional entity, and a second valuation date, such as the exit notice date and a current date, adds $495 + GST. An expert determination under the agreement, or a report for court, is quoted individually. We confirm the fee in writing before we start. No hourly billing.