By Bruce McGechan, CVA — Fealty Business Valuations
A partner buyout valuation determines the fair price for one working owner to buy out another’s equity in a closely-held NZ business. The number isn’t usually the hard part. The choices behind the number are.
In most NZ closely-held companies, the buy/sell clause in the shareholders’ agreement is silent on the things that decide the price: which standard of value, what level of value, what date. When those choices aren’t locked in, two competent valuers can reach numbers that are 50% apart. Both technically correct.
This article is about the price-setting question. It’s not a guide to the broader transaction (for that, see Management buyout process NZ). It’s not a full treatment of the valuation theory either, see: How Does a Shareholder Buyout Valuation work in NZ?
This page is for information only. It isn’t legal, tax, or financial advice. Talk to your lawyer, accountant, and a qualified valuer for your specific situation.
The term gets used loosely. In practice, most “partners” in NZ closely-held businesses are shareholders in a company. Some are partners in a partnership. The valuation principles are similar; the legal mechanics differ.
This article focuses on the most common case: two to four working shareholders in a closely-held NZ company, where one is leaving and the others are buying.
Distinguish from a management buyout. An MBO is a management team acquiring the whole company from the current owner. A partner buyout is one shareholder buying another’s stake while the business continues with the same trading identity and the same ownership group minus one.
The shareholder leaves for one of 7 reasons. Each one shapes the funding mechanism, and sometimes the price:
How does a Shareholder Buyout Valuation work in NZ? covers each trigger in detail. The point here is that the trigger affects funding (insurance, sinking fund, note, debt) and sometimes price — but it doesn’t change the underlying valuation theory.
These are the foundational choices. The pillar covers the theory. Here’s what they mean for a partner buyout in practice.
What definition of “value” applies?
If the shareholders’ agreement says “fair value” with no definition, you have a problem. Two valuers can read it different ways and produce very different numbers.
This is the single biggest swing in a partner buyout number.
From lowest to highest:
A non-marketable minority value can be 40-60% lower than a synergistic control value for the same company. Same business. Same financials. Different premise.
Most buy/sell clauses specify either non-controlling non-marketable (a minority shareholder leaving) or controlling non-marketable (the agreement treats the leaver as if they held control, a fairness convention some agreements use to avoid penalising the departing shareholder).
If the agreement is silent, the valuer has to choose. That choice can be litigated.
The point in time at which value is measured. Only what’s known or knowable at that date counts. Hindsight isn’t permitted.
This matters more than people expect. A valuation dated 1 March 2020 and one dated 1 May 2020 could differ by 30%+ for the same NZ business. Covid happened in between. Same with fuel shocks, interest rate shifts, or the loss of a major customer.
The agreement should specify which date. The most common choices are the date of the trigger event, the date the notice was issued, or the most recent balance date before the trigger.
A 3-shareholder Auckland trades business. Steady cash flow, good team, $1.2M of normalised EBITDA. One shareholder (33% holding) is retiring.
A controlling-interest valuation produces an equity value of $4.8M.
Three ways the leaving shareholder’s 33% could be valued:
Same company, same date, same financials. The number ranges from $0.95M to $2.1M. The agreement decides which one applies.
If the agreement is silent, the valuer chooses — and the parties argue about it.
A buy/sell clause that actually works names 4 things:
Most NZ buy/sell clauses I see are silent on at least 2 of these. Some are silent on all 4. The clause says “a valuation by an independent expert” and stops there.
If the agreement is silent and the parties can’t agree on the choices, the fallback is the Companies Act 1993 — sections 110, 174, and 236. That means litigation. Months. Lawyers. A judge deciding things the shareholders should have decided themselves.
There are three approaches, all of which a credentialled valuer has to consider under professional standards. This article Business Valuation in NZ covers them in detail.
For most profitable NZ SMEs, the workhorse is the Income Approach — capitalisation of earnings. Take a normalised benefit stream (net cash flow to equity with adjustments e.g. non-recurring items, personal expenses, above- or below-market owner pay), divide by a capitalisation rate, apply discounts and get an equity value.
The Market Approach uses comparable business sales transactions. NZ data is thin for SMEs. BizStats NZ helps for small businesses; mid-market deals may need specialist databases.
The Asset Approach (adjusted net assets) usually gives a floor value, not the answer. Book value almost never reflects fair market value.
Briefly, because funding shapes the deal:
Funding is usually a separate workstream from the valuation. But the valuation has to be a number the funding can support — otherwise the deal stalls.
Before a dispute crystallises, not after. Specifically:
Independence is the point. A valuation produced by the leaver’s accountant won’t be accepted by the buyers. One produced by the buyers’ accountant won’t be accepted by the leaver. One credentialled valuer, working under professional standards, is what holds.
How is a partner buyout valuation calculated in NZ? A credentialled valuer applies professional standards (NACVA or APES 225). They take a normalised earnings stream, apply an appropriate capitalisation rate or DCF, cross-check against market evidence, and adjust for the level of value. Standard of value, level of value, and valuation date are set by the shareholders’ agreement (or, if it’s silent, by the engagement letter).
What’s the difference between fair value and fair market value? In a commercial transaction, often nothing. In a legal proceeding under Companies Act ss.110 or 174, courts may apply fair value with no minority discount, which can produce a higher number. The wording of your agreement matters.
Do minority discounts apply in a 50/50 partner buyout? It depends on the agreement and the standard of value applied. If the agreement specifies controlling non-marketable, no minority discount applies. If it specifies non-marketable minority, discounts apply. Many 50/50 agreements treat the parties as if they each hold control.
Who pays for the valuation? Often the company, sometimes split between the parties. The point is that the valuer is paid to be independent. A fixed price removes any suspicion that the fee is shaping the number.
Can we use our accountant’s valuation? Only if your accountant holds a recognised valuation credential (CVA, ABV, CBV, CFA, or CAANZ Business Valuation Specialist) and is independent of both parties. Most general practice accountants don’t.
Fealty offers fixed-price independent valuations for partner and shareholder buyouts. You know the cost before you start.
For most buyouts, that’s the Independent Valuation ($3,900 + GST) — a full written report both sides can defend.
See pricing and what’s included →
For the underlying valuation theory — standard of value, level of value, methods, discounts — see the pillar: How does a shareholder buyout valuation work?.
Related reading: Management buyout process NZ.