Selling a portion only

When one considers that the capital value of a company listed on the stock exchange: the number of shares in issue is multiplied by the share price. Simple. That is the value of the whole company.

So who can fault the logic of the business owner who believes that 10% of his business is worth 10% of the total value of his business?

As a general rule, buying out a minority shareholder based on that formula is extremely generous, or the result of some serious fire on the soles of the majority shareholders’ feet.

People believe the direct proportional relationship to be the case because that’s the way it works on any stock exchange in the world (they think). You buy a miniscule portion of the total shares in issue, and you pay that miniscule portion of the capitalisation value of the entire stock. So why shouldn’t it work the same for small businesses?

These are the three aspects which really matter:

  • The contract which pre exists the dissolution of the partnership
  • The goodwill in the relationship
  • The planning leading up to the event
Pre existing contracts

The contracts which are established at the start of a business relationship between shareholders is absolutely key, in tandem with the company’s memorandum of incorporation (MOI). An agreement which envisaged an eventual dissolution of the ownership relationship will have taken care of this provision, one way or another. That will work today, provided it is in line with the company’s memorandum of incorporation.

If there is no provision for dissolution, then other elements enter into the breakup.

Personal relationships

If “partners” (shareholders in an entity) have a poor and confrontational record of dealing with one another, they should both hope that the pre existing contracts are in good shape. If not, the relationship is likely to plumb new depths. The outcome is more likely to be based on force of personality, personal morality and lawyers’ fees than market value.

The intransigence of one shareholder can make for very bitter memories.

I have seen shareholders refusing to sell at a realistic price because they know that they are in the way, meddlesome, unpleasant, obstructionist, pains in arses.

I have seen departing shareholders being tied to barrels, and forced to accept well below par settlements on the value of their shares because they are old, tired and desperate.

I have seen minority shareholders who were previously given their shares because of a perceived “key person” threat, turning on their benefactors, making life very unpleasant for everybody in the office, and eventually demanding huge out of value settlement demands so that they will go quietly.


Planning for the exit of one shareholder, preferably on an amicable basis will make for a much better realisation of value if the portion is being taken by an external investor, or so conventional wisdom appears to dictate. Of course if the existing partner wants to acquire the remaining share there is still a likely conflict of interests in the value, if pre existing mechanisms are not in place.

So people plan for the famous “right of first refusal” option. On the face of it this sounds very fair: “You find a buyer for your shares, and if I think it is worth it, I will match that offer”. The problem is that it puts a tremendous financial and practical pressure on the selling shareholder, particularly where the remaining shareholder makes it clear to all prospective purchasers that he is not going to be an easy guy to work with. (I’ve seen that, too.)

We have a number of clients who have their businesses valued by us on an annual basis. The presented results are then debated amongst the shareholders, and with us. The process makes for a checks and balances environment which everyone can participate in, openly and honestly. Ways can be found to maximise value, and pay it out in the most beneficial manner to all. In the process, the guy who is buying out his partner inevitably ends up creating even more value for himself, than the alternative of constipating the growth while he plots to get everything for as little as possible.

The important thing to understand is that being prepared for the possible, if not inevitable dissolution of the relationship is the best grown up way of doing things. Talking along the way, working together towards a goal. Fairness all round. Unless you’re a real prick, of course. Then do it another way. I wouldn’t be able to help you there.


Enjoyed this article?

Find more great content here: