Value your shares and determine a strategy!

Shareholders do not distribute profits - the company is almost like Alcatraz 

In certain situations, minority shareholders may feel like prisoners in a company. This often occurs when other shareholders persistently decide not to distribute profits but instead retain them within the company. In such a situation, the minority shareholder, despite participating in a financially successful company, does not benefit from any share in the profits. Additionally, they have no influence over the company's operations, as all decisions are made by majority vote, and the company's governing bodies are composed of individuals elected by the majority shareholders. Often, basic information about the company's situation is also withheld from minority shareholders. However, this does not mean that a minority shareholder has to be a prisoner of the company, condemned to lifelong participation. To exit the company advantageously, they must act strategically.

Valuation of shares - the basis of action 

First and foremost, a shareholder intending to leave the company should determine the value of their shares and establish a strategy based on this knowledge. The value of the company can generally be determined using the asset approach (by estimating the value of the company's assets) or the income approach (by determining the income value, understood as the sum of income that can be obtained from participating in the company over a specific period). However, the actual valuation process should be left to specialists in the field. We will focus on how a minority shareholder seeking to exit the company can leverage their knowledge of its value. 

Strategy towards other shareholders... 

Knowing the value of their shares is essential information that a minority shareholder should possess when entering discussions with other shareholders about the potential sale of their shares. It allows them to verify whether the proposals made by other shareholders are beneficial and to assess the intentions of those making the offers. Based on this knowledge, a minority shareholder can evaluate the validity of making a counteroffer to another shareholder who suggests a lower price and propose acquiring their shares at an equivalent price. 

Valuing the shares also allows for an assessment of whether the remaining shareholders will be able to repurchase the shares of the shareholder intending to leave the company. Often, even though a minority shareholder does not have control over the company, their shares  may be of significant value, making it difficult for the majority shareholders to afford its repurchase. In such cases, seeking a buyer outside of the company becomes a solution. 

...or towards an external investor 

Possessing a valuation of the company's value may enable a minority shareholder, for example, to convince the other shareholders to seek an external investor and sell the entire company to them. Usually, such investors are interested in acquiring all shares in the company and assuming full control over it. However, this does not mean that if the above proposal is rejected by the remaining shareholders, the minority shareholder is condemned to participating in a company they no longer wish to be a part of. Sometimes, certain external entities are interested, for various reasons, in acquiring even a small share package in the company (e.g., competitive entities seeking access to the company's documents). In such situations, valuing the shares allows the minority shareholder to determine the price at which they should sell their share package to a third party. 

Are you selling your company? Do you want to prepare well for negotiations? Check out what experts in companies have to say about it. Learn how to prepare for the process of selling your business. With our guide, you can be sure that nothing will surprise you.  Discover our website! 

Tomasz Rutkowski