Exit provisions for Shareholders Agreement
One of the most important aspects of a shareholder agreement is how your ownership in the business is valued upon exiting. This is because the value of your interest in a business can form a substantial part of your personal wealth.
There are various types of valuation methods that could be included in shareholder agreements. Some of the alternatives are described below:
- Agreed value – the shareholder agreement may provide for a mechanism where the value of the business for the next 12 months is determined by a pre-agreed formula. This type of method may not always be beneficial to you as the value calculated may not always accurately reflect the future prosperity of the business.
- Agreed capitalisation multiple – some shareholder agreements may indicate that the value of the shares is to be based on an agreed capitalisation multiple. The multiple may be based on the average of the normalised results of historical periods or the latest historical earnings. This method of valuation may not always be advantageous to you because past earnings do not always reflect future earnings of the business.
- Independent third-party valuation – a shareholder agreement may stipulate that the values of the shares are to be determined by an independent valuer. This method is generally considered one of the most equitable ways to value shares.
- Market value – if a shareholder agreement is silent on the issue of shareholder valuation upon the exit of a shareholder, then a shareholder may market their shares internally or externally to establish their value. This method may cause disruption to the business and does not always result in a sale.
It is important that you seek independent legal advice prior to entering into any shareholder agreement. If you require advice in regards to a shareholder agreement, the team of lawyers at The Quinn Group can help on (02) 9223 9166 or submit an online enquiry.