How should I calculate my shares?

Question

Here's context for my question : note that this is a hypothetical

I live in Belgium, Europe (if that is any relevant).

I own 50% of the company I work in (as a manager).

I've been working here 3 years.

I have now decided to leave, and sell my shares to the other shareholder, who will then be holding 100% of the company.

I'm now making up numbers for simplicity.

Year 1, the company made 40.000€, while expenses were of 60.000€. Ended up 20.000€ in loss that year.

Year 2, the company made 70.000€, with about 60.000€ in expenses. Ended up 10.000€ in profit. (still a grand total of 10.000€ in loss)

Year 3, the company made 450.000€, with about 100.000€ in expenses. Ended up 350.000€ in profit, for a grand total of 340.000€ in profit.

Like I said, I am now leaving the company. How do I calculate what my 50% is worth ?

I'm not a native english speaker, my current use of gain means "money made by the company before expenses", and profit means "money made by the company after expenses".

• Based on the gain of last year?
• Based on the gained all times combined?
• Based on the profit made last year ?
• Based on the profit made all times combined ?
• Based on the average profit of all years combined ?
• Based on the average gain of all years combined ?
• Other solution provided by a wonderful StackExchange user.

There is nothing in the contracts stating anything about when / how / what happens and we is taken when a shareholder sells his shares. So it all has to be decided and agreed upon. What I'm trying to understand here is :

• What is legal/illegal to do here (What is rightfully mine, and do we have to negotiate legitimately?)
• What is common behaviour in that situation (this is why I added my country of residence/work)
• What's the best solution overall.

Currently, the solution is, I'm leaving with 50% of what was made last year only, before expenses, which means about 200.000€

But this feels way too easy.

What do you guys think?

Answer 1

This is a very hard and complex problem without one single answer. Companies are generally valued on a complex combination of current assets and likely future cash flows, the latter of which is exceptionally hard to calculate accurately. Certainly on the numbers above in terms of growth rate/margin that looks a great business, if you are growing at that rate and now making ~350k on 100k of expenses. Fast growing, high margin businesses are usually very valuable (see current typical P/E ratios of 20x+ for good, growing companies etc).

Generally the most accurate method for pricing companies is for shares to be traded and the market to quickly balance the bull and bear opinion outs to a 'true' price that reflects the mid point between the buy and sell offers. Obviously in a very small company or private sale this becomes much harder/impossible as it can't be floated in any meaningful way, but versions of this wisdom of crowd type effect can be done by approaching a few outside parties and asking them what they would pay/how they would value it (similar to asking a few estate agents for valuations of a house before a private sale) to at least get some benchmark estimates of what similar private players might pay.

If this type of option is completely off the table, you're basically just left with a situation where it's your negotiation skills vs the remaining manager, and that (assuming you have little to no regard for anything but making the most money from the deal), becomes much more like a poker game of trying to work out which valuation metrics they will be responsive too, what weaknesses you feel they have and hammering away at them as hard as possible while trying to not show any of your own weaknesses.

If they are a close friend/family or other situation where leaving on good terms is critical, you probably have to accept either not getting the maximum value for your share of the business, or to give up the valuation to a third party you and the remaining manager trust and taking what they say is fair, or some combination of this and averaging some other outside valuations. Hard call these spots, as very dependent on how important the relationship is.

Answer 2

First, for clarity,

1. 200,000 is a joke. I assumed it was a typo for $2 million.

So forget about "200,000" !

(Was it a typo?)

2. You'll sell it for some multiple of the present profit. Example, 5x, 10x, 20x.

In this situation, there is absolutely no formula for the multiple.

The price is a sheer judgement call - a negotiation.

3. Multiple depends on the industry. Restaurant - 5x. California tech startup - 40x.

If the business is a restaurant, you should get say 1/2 to 1 million. If the business is an app-web-startup, say 10 million.

Most importantly - congratulations!