A shareholder buyout valuation determines the fair price for one shareholder to buy out another's equity in a shared business. It gives both sides a defensible number so the deal can proceed without damaging the relationship or ending up in court.
Most buyout valuations in NZ follow the buy/sell provisions in a shareholders' agreement. Those provisions typically specify three things the valuer needs: the standard of value (usually fair market value), the level of value (e.g. non-marketable minority or controlling interest), and the valuation date. They may also set out funding: company-paid life insurance, the buying shareholder's note, or external financing.
Note: This post is for information only. It doesn't contain legal or tax advice. Talk to professional legal and tax advisers as needed.
Buyout valuations are triggered by events that change who owns shares, or who's involved in the business. The most common triggers in buy/sell agreements:
Death. The shareholder dies, leaving the estate holding an illiquid asset. The company may face unknown family shareholders and an obligation to fund a share purchase. Life insurance is the most common funding mechanism here, but according to the Insurance Council of New Zealand, business life insurance uptake among NZ SMEs is low. Most businesses are exposed.
Divorce. A shareholder's marriage ends. Their ex-spouse may claim a share of the business interest under the Property (Relationships) Act 1976. The company won't want an ex-spouse as a shareholder. A buyout is the practical solution.
Disability. A shareholder can't work (as defined in the agreement). They want to be bought out, or the company wants to buy them out.
Retirement. The retiring shareholder wants to move into less risky assets. The remaining shareholders don't want interference, and they don't want the retiree benefiting from growth they aren't contributing to. In NZ, where the average age of SME owners is now over 55, retirement is the most common buyout trigger.
Voluntary departure (non-competing). The shareholder leaves to pursue interests outside the industry. Mostly a funding question — benevolent on both sides.
Voluntary departure (competing). The remaining shareholders may stretch out payments and negotiate on price. They don't want to fund a future competitor. Non-compete clauses become critical.
Termination. Both parties may want to buy or sell the shares. The company will almost certainly want the terminated person's ownership removed. The question is whether a penalty or discount applies under the agreement.
The shareholder can fall back on the Companies Act 1993. Under section 174, minority shareholders have protection from conduct that's oppressive, unfairly discriminatory, or unfairly prejudicial. Under section 236, the court can order the company to buy back shares.
These are safety nets. They also mean litigation, cost, and delay. A well-drafted shareholders' agreement avoids all of that.
A qualified business valuer needs 3 things:
If these aren't in the shareholders' agreement, the valuer has to establish them. This is where problems start. Two valuers making different choices on these fundamentals can reach very different conclusions. Sometimes litigation follows.
The standard of value is the definition of value being used — "the identification of the type of value being utilised in a specific engagement" (NACVA Glossary).
Fair market value is the most commonly specified standard for buy/sell provisions. All definitions come back to the same core: the price between a hypothetical willing buyer and seller, at arm's length, in an open market, under no compulsion, both having relevant knowledge of the facts.
Fair value depends on context. In commercial transactions in NZ, it often aligns with fair market value. In legal proceedings under the Companies Act 1993 — particularly section 110 (minority buyout rights) and section 174 (oppression remedy) — courts may apply a no-discount rule. The minority shareholder's interest isn't discounted for lack of control.
Investment value is the value to a particular buyer. It may include synergies only available to that buyer. A large corporate that can eliminate all overheads while keeping the same gross margin sees a very different investment value than a financial buyer with no synergies at all.
For most buy/sell provisions, fair market value is used. The definition is specified in the agreement.
The level of value dictates the starting point for all valuation calculations. Get this wrong (or leave it undefined) and you get wildly different conclusions.
From lowest to highest:
Why this matters: One valuer determines the controlling, non-marketable value at 5 million. They apply a 30% discount for lack of control (a common range, per Hitchner, Financial Valuation, 5th ed.) and conclude the minority interest is worth 3.5 million. A second valuer, interpreting the agreement differently, values the same company at synergistic control: $7 million.
That's a doubling. Both valuers can be technically correct given their premises.
Typical discounts for lack of control range from 15–35% and discounts for lack of marketability from 15–40% (Mercer, Business Valuation: An Integrated Theory, 3rd ed.).
Most shareholder buyout agreements specify non-controlling non-marketable (minority in a private company) or controlling non-marketable (majority in a private company).
The valuation date is "the specific point in time at which the conclusion of value applies" (International Glossary of Business Valuation Terms, 2022). Only what's known or knowable at that date counts. Hindsight isn't permitted.
This matters more than most people expect. A valuation dated 1 February 2020 and one dated 1 April 2020 could differ by 30%+ for the same company. Economies, industries, and companies can change drastically in weeks (think Covid, fuel shocks).
Understanding how to value a business in New Zealand starts with 3 established approaches: Income, Market, and Asset. Professional standards (including NACVA standards followed by CVA holders) require the valuer to consider all 3, even if only 1 or 2 are adopted.
Values a business based on its future earning potential. It's the most commonly used approach for profitable NZ SMEs.
Capitalisation of Earnings Method. The workhorse for businesses with stable, predictable earnings — the majority of mature NZ SMEs. The valuer takes a normalised benefit stream (adjusted for non-recurring items, personal expenses, above- or below-market owner pay) and applies a capitalisation rate reflecting the risk of achieving that income.
Value = Normalised Benefit Stream ÷ Capitalisation Rate
For small owner-operated businesses, the benefit stream is typically Seller's Discretionary Earnings (SDE) which is EBITDA plus one working owner's salary. For NZ SME businesses, capitalisation rates would range between 18% and 25% before discounts. Note the cap rate and the multiple are two sides of the same coin: a 4.0× multiple implies a 25% cap rate.
Discounted Cash Flow (DCF). Used when future earnings are expected to vary — a growth phase, lumpy capex, or non-linear trajectory. The valuer forecasts net cash flows over 3–5 years, calculates a terminal value for the stable period beyond, and discounts everything back to present value.
Value by reference to what comparable businesses have actually sold for. Conceptually the simplest — similar to how real estate is valued by recent comparable sales.
Completed Transactions Method. The valuer examines prices paid for similar businesses, calculates multiples (typically MVIC/Revenue and MVIC/EBITDA), and applies the best-fit multiple to the subject company. In NZ, comparable transaction data is limited to BizStats NZ for small business NZ transactions, and sample sizes for specific industries can be small. Mid-market business transactions may be in international databases or require searching of stockmarket announcements.
Guideline Public Company Method. Compares the subject company to similar listed companies. Public data is readily available, so multiples (Price/Revenue, Price/EBITDA, Price/Earnings) can be calculated. But significant adjustments are needed to bridge the gap between a listed company and a private NZ SME so for this reason is not often used.
Adjusted Net Assets Method. Adjusts the book value of assets and liabilities to fair market values. Often provides a floor value — the minimum if all assets were sold and liabilities settled in an orderly manner. Book value is almost never the right starting point. Accounting records historical cost, not current market value.
A business valuer conducts the valuation. The individual personally, not the firm. Qualifications matter.
NZ has no single legally mandated credential for business valuers. But to be accepted as an expert witness in NZ courts, a valuer must show rigorous certification, substantial experience, and continuing professional education.
Credentials include CVA (Certified Valuation Analyst, NACVA), CBA (Certified Business Appraiser), ABV (Accredited in Business Valuation, AICPA), CBV (Chartered Business Valuator, CBV Institute), CFA (CFA Institute), and CAANZ Business Valuation Specialist.
A credentialed valuer follows professional standards — NACVA Professional Standards for CVA holders, APES 225 for CAANZ specialists — covering methodology, independence, and reporting. This should be specified in the engagement letter. Following a recognised standard produces consistent, defensible results that hold up in court.
There's an important informal distinction in NZ: a business valuer (credentialed, follows professional standards) vs. a business appraiser (anyone who offers a value opinion, including business brokers).
What it looks like from a client's perspective:
Step 1 — Engagement & Scope. The engagement letter locks in the key terms: standard of value, level of value, valuation date, entity to be valued, who the report is for. Unclear engagement equals a contested result.
Step 2 — Financial Analysis & Normalisation. 6 years of annual financial statements (prepared by the external accountant) are preferred — 5 years of percentage change goes across a business cycle. The financials get "normalised": one-off items, personal expenses, and non-arm's-length transactions are adjusted out. Ratio analysis and common sizing follow. Many questions come at this stage.
Step 3 — Risk Assessment. Questionnaires establish the risk profile driving the discount or capitalisation rate. Customer concentration, key-person dependency, industry cyclicality, management depth. This is where the valuer builds the quantitative case for the rate of return a buyer would require.
Step 4 — Valuation & Draft Report. The valuer applies the appropriate approaches, develops a conclusion of value, and prepares a draft. The draft goes to the client for feedback — clients often have insights the valuer hasn't captured.
Step 5 — Final Report & Handover. Feedback is considered, adjustments made where warranted, and the final report presented. The report explains methodology, assumptions, and conclusion in a format both parties can follow.
Timeline and cost: Once information is in and questions answered, expect 3–4 weeks. Fealty's fixed price for a shareholder buyout valuation is $3,900 + GST — you know the cost before you start. (Litigation work is priced separately.)
Not sure which approach fits your situation? Talk to Bruce — initial conversations are free.
Not defining the standard of value. Different standards produce different conclusions. The fair market value of a company can be much lower than its investment or synergistic value. If the agreement doesn't specify, the valuer chooses — and the other party may disagree.
Not defining the level of value. A non-controlling, non-marketable value can be 40–60% lower than a synergistic control value for the same company. Two competent valuers, both technically correct, miles apart.
Using a fixed-price formula. A formula that was reasonable when the agreement was signed can be wildly inaccurate years later. Even a multiple-based formula can mislead if the multiple no longer reflects current conditions. Professional valuation standards exist precisely because fixed formulas can't account for changing circumstances.
Failing to address funding. How will the buying shareholder fund the purchase? External financing? Shareholder note? Life insurance? Each option has different implications for the buyer's risk, the company's cash flow, tax treatment, and legal structure. A valuation without a workable funding plan is incomplete.
Using an unqualified valuer. Qualified valuers follow professional standards and understand the technical nuances: standard of value, level of value, discounts, the equity bridge. An unqualified valuer may not even know these distinctions exist — producing a number that looks precise but sits on undefined foundations.
What's the difference between fair market value and fair value in New Zealand? In a commercial transaction, there's often no practical difference — both apply discounts for lack of control and marketability. In a legal case under the Companies Act 1993, particularly sections 110 and 174, courts generally apply a no-discount rule for oppression remedies. That can mean a higher value for the minority shareholder.
Should both parties get their own valuer? Generally, no. One independent valuer is recommended. Two valuers can reach very different conclusions — especially if the agreement is unclear on standard or level of value. Expense, delay, and potential litigation follow. If the parties can't agree on the single valuer's conclusion, the agreement may provide for a third valuer to arbitrate (Mercer, Buy-Sell Agreements for Closely Held and Family Business Owners, pp. 181–184).
How is a buyout valuation different from a broker's appraisal? A broker's appraisal prices the business for sale to an external buyer, typically assuming an asset sale and using the market approach only. It isn't held to professional valuation standards. Standard of value, level of value, and premise of value may not be defined. A formal business valuation is conducted by a credentialed valuer under professional standards — suitable for shareholder transactions and defensible in court.
What if the two parties disagree on the result? The point of a well-structured report is to explain methodology, assumptions, and conclusion clearly enough that both parties can follow how the number was reached. Both parties should have the chance to give feedback on the draft before it's finalised. Disagreement usually stems from undefined terms in the shareholders' agreement, not the valuation itself.
Can a buyout valuation be used for tax purposes? Only if the engagement letter specifies this. The Income Tax Act 2007 uses "market value," which is similar to but not identical to "fair market value." If the valuation needs to serve both a buyout and a tax purpose, the standard of value must be consistent with the tax legislation. IRD guidance on share transfers and specialist tax advice are recommended.
Bruce McGechan founded Fealty Business Valuations. He's one of only 2 Certified Valuation Analysts (CVA) practising in New Zealand — and the only one with published, fixed pricing. The CVA is awarded through NACVA, the international body dedicated to business valuation.
He holds a Master of Entrepreneurship (Hons, Otago) and a BCA in Accounting (Victoria). Before Fealty, he held corporate roles at Fletcher Challenge, DB Breweries, and Vodafone, then spent over a decade advising NZ business owners on growth and M&A through 2 international M&A advisory firms.
Bruce specialises in business valuation in NZ for internal transactions — shareholder buyouts, management succession, family transfers, buy/sell agreements. The deals where the relationship matters as much as the number.
Fealty offers fixed-price business valuations in New Zealand. You know the cost before you start.
For most buyouts, that's the Independent Valuation ($3,900 + GST) — a full written report for a buy/sell agreement or legal process.
See pricing and what's included →
Related reading:
Partner Buyout Valuation NZ: How the Price Is Actually Set and Management Buyout Process NZ: How an MBO Actually Works