Corporate valuations - An art or science? :: Mmegi Online

If you are a business owner who has entered into a shareholder's agreement, I am sure you have come across clauses and statements which refer to 'fair market value', 'willing buyer and willing seller', 'discounts', 'premiums', 'minority stake', 'majority stake' and 'determination by independent auditor'.

These terms are often included in clauses which govern options, sale or transfer of shares, or other shareholder exit mechanisms, and are used to determine the valuation of the business or a block of shares.

For many this begs the question, what is a fair market value and who is responsible for undertaking the valuation, especially if an independent valuation is required. I have seen many shareholders’ agreements which puts the onus on the shareholders to appoint the company’s auditor to undertake the valuation of the respective shareholders’ equity. The role of an auditor is to express an independent opinion on the fairness and reasonableness of the company’s financial statements.