Who determines the valuation of shares that want to be sold back to a private company?
We have a small family private company that consists mainly of vacation properties (unlikely to be sold immediately) and some cash liquidity. A person with 27% of the shares is looking to sell them back to the company.
I see that there are various methods to value these shares. If we looked at the total value of the assets (property + cash), it would appear that the shares are worth much more than just cash alone. My question is, who has the authority to decide the method of valuation (board? directors?) and then whether the seller is obligated to accept that price per share?
If the family company has a written shareholders agreement, that should outline how the company should ultimately be valued at any given time, as well as the method by which an existing shareholder can sell his or her shares back to the company. If no such language exists, or language that speaks to whether the board or directors of the company have the power to rule on these matters, the majority shareholders should try to come up with a methodology for how to value the company that the seller of shares agrees with. If an agreement can not be reached as to how to value the company, then there are a number of third party organizations that can come in and give you a fair market value after reviewing your books. The downside to this is that these companies are often pricey.
I'm guessing that you do not have a shareholders/partnership agreement in which a formula has been set to determine the value of the shares. If this is the case, you're not alone.
You would start, therefore, with the value of the hard assets and cash, minus any liabilities. This is called the "Book Value" formula and can usually work in this type of situation. With one significant change.
You would also discount the value of the shares due to the minority shareholder having the lack of controlling interest (they only represent 27% of the outstanding shares and cannot, therefore, control anything). This "discount" could be as high as 40%, depending on the situation. But it does not have to be.
The other issue has to do with the buyer(s). It would be easier to have the shares offered to the other shareholders to see whether or not they would want to buy them. If someone else owns 27%, they could end up with the controlling interest in the company. They might also be willing to pay more for it. I would start with this. Even if you have an outside party set the value of the shares, the transaction still requires a "willing buyer and a willing seller."