5.17 Impact of shareholder or partnership agreements on business valuation

Any company or business partnership with more than one owner should conclude a shareholder or partnership agreement as soon as the business starts up. Some of the key points in such an agreement include:

  • The role that each owner plays in the business;
  • The investment each owner makes into the business;
  • The amounts that each owner may take out of the business, whether as wages, rent, dividends, fees, interest, loan repayments, etc;
  • What happens in the event of a major life change for an owner (death, incapacity, divorce, willing or involuntary departure etc) and how life insurance can help to mitigate some of these risks;
  • What happens if there is a disagreement on future direction of the business;
  • How the parties can buy each other out and how the ownership interests will be valued;
  • What happens if an outside party offers to buy all or a part of the business.

Shareholder agreements can have a critical impact on a valuation conclusion.

The CBV who is engaged to value the business needs to review the agreement as many of the items can have an impact on the business value, or the share that each party has of the en-bloc value.

The first item the CBV should review is how the business is to be valued. There is little value in a major valuation exercise if the agreement provides a simple formula (notwithstanding that the formula may be inappropriate).

Thereafter, the CBV needs to ensure that the valuator’s report takes account of the many and varied aspects of the agreement. In complex businesses, with detailed shareholder or partnership agreements, this may take a considerable amount of time, especially if the agreement is unclear or ambiguous on some issues. The CBV will also need to consider the implications of circumstances where the terms of agreements have been disregarded in the past.

Contact your business lawyer if you need to draw up an shareholder or partnership agreement.

Contact MVI if you require clarification on how the agreement may impact the valuation of your business.