Valuations of companies- Buying out a partner/partners

When the opportunity arises to buy out a fellow shareholder’s interest in a business, or for that matter when it comes to buying in to a business, a crucial first step is to get a valuation of the business.

 

There are three main approaches to valuing  a business.
1. Net asset value
Assume you will sell all the assets at a public auction. The yield from this sale, after subtracting the liabilities of the business will be the value.

2. Historic performance valuation
This is based on past profits/losses.

3.Future performance valuation
The value of future cash flows will be discounted to determine a net present value.

Consult your accountant to do these calculations for you. They will most likely determine the value using all three methods and then give you a range of values. These you will use when negotiating about the price.

Once the total value of the business is determined, multiply this by percentage of the shareholding you would like to acquire to give you the purchase price of the shareholding.

Your accountant will be able to best advise you on the way forward. Because, after the value is determined, he will then look at yours and the company’s whole tax situation and be able to advise you on the financing of the shares purchase. The options from here on are too varied and wide for anybody to give you advice on the tax implications of this transaction.