What is a fair price for an internal business sale?

A fair price for an internal business sale is one an independent valuer can defend to both the buyer and the seller: built on a stated standard of value (almost always fair market value), a method that suits the business, and evidence both parties can read. An internal sale happens away from the open market, so the price has to be built from evidence. Whether you’re selling shares to your co-owner, your general manager or your daughter, fairness lives in how the number was reached, and in both parties seeing the working.

This page covers how that number gets built in New Zealand: the standards, the methods, the three situations I see most often, and the process that gets both sides to sign.

Why internal sales are the hard case

On the open market, price is discovered. Buyers compete, offers arrive, and the winning bid tells you what the business was worth.

An internal sale has one buyer and one seller, and they already know each other. They might be brothers. They might be a founder and the manager who has run the workshop for 15 years. After settlement they’ll keep turning up to the same barbeques, which means the price has to survive scrutiny from both sides at once, this year and in five years when someone re-reads the agreement.

Internal sales are also more common than most owners assume. Ministry of Business, Innovation and Employment figures put New Zealand’s small businesses (fewer than 20 employees) at 575,703 in 2022, which is 97% of all businesses in the country. Exit planning author Christopher Snider’s finding, which I quote often, is that only about one in five private businesses that go to market actually sell. For the many, the realistic buyer is someone already inside the tent: a co-shareholder, a manager, or family.

So the price has to be built.

“Fair” has a technical meaning

Valuers call the definition of “fair” the standard of value.

For an internal sale, the standard I recommend is fair market value. It’s the one with a definition every credentialled valuer works from; the International Glossary of Business Valuation Terms puts it as “the price … at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts”.

Inland Revenue’s “market value” is in substance the same test. Fair market value excludes synergies available only to one particular buyer; those belong to investment value, a different standard.

You’ll also meet the phrase “fair value”, and I’d treat it with caution, because it has no single meaning. In a Companies Act dispute the courts give it one shape, typically a pro rata price with no discount for lack of control. In financial reporting, NZ IFRS 13 gives it another, an exit price in an orderly transaction between market participants, which sits close to fair market value.

Outside those two settings it has no settled definition at all; plenty of valuation glossaries simply decline to define it. Chris Mercer’s warning about writing it into an agreement: “you may be in for surprises as to what fair value means and you may end up thinking that the result you get is anything but ‘fair’.”

The gap is real money. On a $2m company, a 25% holding is $500,000 pro rata; the fair market value of the same parcel, after discounts for lack of control and marketability, can be materially less. Check what your constitution or shareholders’ agreement says before anyone argues about multiples, and if it says nothing, agree fair market value in writing and move on.

In some litigation cases, under section 174 of the Companies Act 1993, a shareholder whose position is “oppressive, unfairly discriminatory, or unfairly prejudicial” can ask the court to intervene, and the most common remedy is an order that their shares be bought, at a price that typically carries no discount for lack of control.

The Act’s minority buy-out rights likewise entitle a shareholder who dissents from certain major decisions to be bought out at a “fair and reasonable price”. 

How the number gets built

Valuation has three approaches: income, market, and asset. For most trading SMEs the income approach may carry the weight, cross-checked against the market approach if data is available; the asset approach matters where the balance sheet is the business, as with property or investment entities, or the business is loss-making.

The income approach starts with maintainable earnings. That means normalising the accounts such as owner salaries restated to market rates and one-off costs removed. What’s left is the profit a new owner could reasonably expect the business to keep producing.

Those earnings are then capitalised using a cap rate that reflects risk: customer concentration, supplier dependence, how much of the business walks out the door when the founder does. Comparable transaction evidence may anchors the cap rate to what buyers of similar NZ businesses have paid.

From there the valuer bridges from enterprise value to equity value, adjusting for debt, surplus assets and working capital. The result is a value for a particular parcel of shares changing hands.

Equal partners

Two shareholders at 50/50 means neither side can impose a number.

The working answer is a jointly appointed independent valuer: one brief agreed by both, one report both receive, cost shared. What each party does with the report is then a commercial negotiation, and it’s a negotiation about terms, with the worth question already settled.

A 50% parcel deserves one technical note. Half the shares is control of nothing; neither shareholder can pass an ordinary resolution alone, so a discount for lack of control applies even at 50%, though a more modest one than a small minority stake attracts.

A worked example: two 50/50 shareholders in a $2.4m services company agree that one will buy the other out. The valuation puts enterprise value at $2.4m; after $400,000 of debt the equity is $2m, and the departing parcel’s pro rata share is $1m. Apply a discount for lack of control, say 15% for illustration, and the parcel’s fair market value is $850,000 before the terms conversation starts. The right discount is a matter of evidence and judgement in each engagement, and the arithmetic stays friendly only because the $2.4m is a number both parties trust.

A majority shareholder buying out a minority

This is where the level of value question bites. Is a 20% parcel worth 20% of the company, or 20% less a discount because minorities can’t control dividends or sale timing?

Some shareholders’ agreements answer this in advance by prescribing a pro rata, no-discount price; others leave the parcel to be valued as it stands, discounts and all. Both can work, provided the words are explicit. Where the agreement is silent, agree the standard of value (e.g. fair market value) and the level of value (e.g. non-controlling and non-marketable) in writing before the valuation starts, because together they move the answer more than any argument about earnings will. If the parties are already in dispute, the fairness question changes shape again; I’ve written separately about how to resolve a shareholder disagreement on price.

An outside investor buying in

The one internal-adjacent case with a real price signal. An investor’s offer tells you what the parcel is worth to them, which is investment value: it may include synergies, and it may reflect strategic motives the existing shareholders don’t share.

An independent valuation gives the current shareholders a fair market value benchmark to negotiate against, and it stops the incoming offer from quietly becoming the price for every later internal transfer. New shares versus existing shares, and the dilution arithmetic that follows, deserve their own advice.

The investor case also raises a governance point. The shareholders deciding whether to accept the offer are often the same people whose stakes it dilutes, so an independent number protects the directors as much as the sellers.

The valuation date matters

Every valuation is grounded at a date. Value moves with trading, with the economy, and with events inside the business; a price set from December accounts can be stale by November.

For an internal sale, agree the valuation date in writing before work starts, usually the latest balance date with a bridge to current trading. Buy/sell agreements should go further and define the date a trigger event sets, because the gap between trigger and settlement is exactly when the parties’ incentives diverge.

What moves the price that owners don’t expect

Key person risk is the big one. If customers, key staff relationships and the supplier terms all attach to the exiting shareholder personally, part of what looks like business value leaves with them. 

Surplus assets cut the other way; the commercial property or the excess cash sitting in the company adds to equity value on top of the trading business.

And terms trade against price. Vendor finance, an earn-out, a staged share transfer over three years: each shifts risk between buyer and seller, and each has a price effect. Once an independent value is on the table, the parties can trade terms in the open, with the price effect of each one visible.

Process is half the fairness

After 90-plus valuations, my observation is that acceptance depends as much on process as on the answer. A value one side commissioned privately starts the conversation defensive. A value both sides commissioned, from a brief both approved, starts it halfway to agreement.

The process that works: jointly appoint an independent valuer with no other relationship to either party, agree the standard of value and the valuation date in writing, share the cost, and agree upfront whether the result is binding or a basis for negotiation.

Better still, write that mechanism into your shareholders’ agreement before anyone triggers it. I’ve covered why buy/sell agreements fail without independent valuation separately, and Snider’s research gives the reason to bother: 75% of owners who exit profoundly regret it within a year, and a price that festers is a big part of why. Family transfers add their own layer, covered in valuation in family succession.

What it costs and how long it takes

Fealty prices internal transaction valuations as a fixed fee, published before work starts, with a typical turnaround of three to four weeks; dispute-standard reports take longer. Current fees are on the pricing page.

You’ll need to provide five years of financial statements, the shareholders’ agreement or constitution, to complete questionnaires, and answer questions. Both parties see the same report. 

Common questions

Can we just agree a price between ourselves without a valuation?

Legally, yes, in most cases. The risk arrives later: a sibling who feels short-changed, a shareholder who re-reads the deal after a falling-out, or Inland Revenue asking about a related-party transfer. An independent valuation is cheap insurance against re-litigating the price years after settlement.

Is a fair price the same as fair market value?

For an internal sale, fair market value is the standard I recommend, because it’s the one with a settled definition. “Fair value” floats: the courts give it one meaning in disputes, accountants another in financial statements, and outside those settings it has no agreed meaning at all. Which standard applies to your transaction is a legal and contractual question, and it can move the price by six figures, so settle it in writing first.

Who should pay for the valuation?

For internal sales, splitting the fee works best, and it signals that the valuer acts for the transaction and for both parties equally. Some shareholders’ agreements prescribe the split.

What if one of us thinks the valuation is wrong?

A valuation built on stated assumptions can be tested: challenge the inputs, provide the missing information, and the valuer can revisit. I provide a draft valuation report for client feedback. That’s a better conversation than duelling valuers. If the disagreement runs deeper, the escalation options go from renegotiation through mediation to the Companies Act remedies, in that order of expense.

Do family sales get valued differently?

The method is identical; the surrounding decisions differ. Gifting, sibling equity, relationship property and estate planning all sit on top of the valuation in a family transfer, which is why I’ve written about family succession separately.