Buying out a business partner: how to value their share

Partner buyouts fail for one of two reasons: the parties never agreed what they were valuing, or one of them relied on a figure the other had no reason to trust. Both are avoidable, and both are cheaper to fix before a price is discussed than afterwards.

Read the paperwork first

Before anyone runs a number, check the articles of association and any shareholders' agreement. They frequently dictate the valuation basis ("fair value", "market value", "as determined by the company's accountants"), whether a discount applies to a minority holding, who appoints the valuer, and how long the payment can be spread. A valuation produced on a basis the documents do not permit is worthless.

Fair value or market value?

Market value. What a hypothetical willing buyer would pay for that specific holding. A 25% stake with no control and no exit is worth materially less than 25% of the company, so discounts apply — commonly 15% to 40% in UK SMEs.
Fair value. A pro-rata share of the whole, usually with no minority discount. This is what most shareholders' agreements specify and what the courts generally apply in unfair prejudice petitions, on the basis that the departing shareholder is not choosing to sell into an open market.

The gap between the two bases on a 30% holding in a £1.5m company can be well over £100,000. Agreeing the basis in writing is the single highest-value five minutes in the whole process.

Valuing the company, then the holding

The company itself is valued in the normal way: normalised maintainable earnings, a multiple evidenced against comparable transactions, and a cross-check on an asset or cash-flow basis. Two adjustments matter especially in a buyout:

Both owners' remuneration is normalised. If the departing shareholder works in the business, the cost of replacing them comes off the profit. If they do not, their drawings are added back.
Surplus cash and director's loans are dealt with separately. Cash above working capital needs, and any loan balances either way, are settled outside the earnings multiple rather than buried in it.

Only then is the holding priced: pro-rata for a 50/50 split, discounted for a genuine minority on a market value basis, and sometimes with a control premium where the purchase takes the buyer from 50% to 100%.

Funding and structure

Price and payment are separate negotiations. Most SME buyouts settle as a mix of an upfront payment funded by lending or reserves and a deferred balance over two to four years, often secured and interest-bearing. A company share buyback can be the cleanest route, but it requires distributable reserves and compliance with the Companies Act, so involve your accountant before agreeing terms. Where the parties disagree about the future, an earn-out element can bridge the gap — the mechanics are covered in our guide to earn-outs and deferred consideration.

Where an independent valuation earns its fee

In a buyout, both sides know the business — what they do not have is a number neither of them wrote. An independent report, jointly instructed, sets out the method, the comparables and every assumption, so the disagreement narrows to something testable. It also gives the accountant, the solicitor and any lender a document they can rely on. If the relationship has already broken down, see our shareholder dispute valuations page; if this is a management team buying the owner out, see MBO valuations.

Common questions

How do you value a 50% share of a business for a partner buyout?

Value the whole company first on normalised maintainable earnings, then work out what the specific holding is worth. A 50% holding is usually taken as a pro-rata share of equity value with little or no discount, because neither party has control. Discounts appear for holdings below 50%, and a premium can apply where the buyer's stake moves them from minority to control.

Should a minority discount apply when buying out a partner?

It depends on the basis of valuation. On a market value basis a minority holding is worth less than its pro-rata share — discounts of roughly 15% to 40% are common in the UK depending on the size of the holding, dividend history and information rights. On a fair value basis, which is what most shareholders' agreements and courts in unfair prejudice cases use, no minority discount is applied.

What does the shareholders' agreement decide?

Often everything. Many agreements set the valuation basis, name the valuer or specify an accountant acting as expert, and prescribe a timetable and payment terms. Check the articles and any shareholders' agreement before commissioning anything, because a valuation on the wrong basis is not binding and will simply be rerun.

How is a partner buyout funded?

Common routes are cash from company reserves via a company share buyback, bank or asset-based lending, seller-deferred payment over two to four years, or a mix. A company buyback has to satisfy the Companies Act 2006 requirements and needs distributable reserves, so the funding route should be tested with your accountant before the price is agreed.

Do we both need our own valuer?

Not usually. The cheapest and least damaging route is a single independent valuer jointly instructed by both shareholders, with the terms of reference agreed in writing up front. Separate valuers are worth the cost only where the relationship has broken down or litigation is already underway.

The Business Valuers provides independent, fixed-fee valuations for UK SMEs. This article is general guidance, not legal or tax advice.