Volume 11, No. 1, Spring 2006

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Business Transaction: Purchase of Minority Interests

GENERAL DESCRIPTION OF COMPANIES INVOLVED
Following is a comparison chart of data for dissenting shareholder disputes in three well-established companies. All three transactions were sales or transfers of stock from the minority shareholders back to the company itself or to other individuals within the company. Each of the three companies faced some threat of litigation. Appraisals were completed for each company with some type of arms length negotiation between parties in each situation.

TRENDS IN MULTIPLES
No trends in value seemed to evolve up or down based on the dispute. Overall value appeared to be derived based on future profitability and growth, with applications and methods specific to the industry. Nonetheless, all three companies sold/transferred the minority interest in a fairly narrow range of multiples of earnings (5.6 to 8.0) while multiples of revenue and book had a very wide disparity.

APPLICATION OF DISCOUNT
For two of the three companies, no lack of control or lack of marketability was applied. Note also that if there was a buy-sell agreement, valuation was not covered in the agreement and therefore had no effect on the value of the company. Company A had a buy/sell agreement which instructed the parties how the dissenter interest was to be valued and then purchased. The agreement allowed for a lack of marketability discount.

GENERAL LESSONS:

• Litigation of shareholder disputes can be very expensive for both parties.
• Well-written buy/sell agreements are essential in shareholder disputes. They save money for each side, expedite the transfer of shares, and hold up in court.