Does a company’s shareholders’ agreement impact its valuation?

1.5 min read.

A shareholders’ agreement can have an impact on the valuation of a company, even if the valuation is for a 100% equity interest. Here are a few ways in which a shareholders’ agreement can affect the valuation of a company as a whole:

1. Restrictions on transfer of shares: Some shareholders’ agreements include restrictions on the transfer of shares, which can limit the liquidity of the shares and make them less attractive to potential buyers. Even if a buyer is acquiring a 100% equity interest, these restrictions can affect the value of the company by limiting the potential pool of buyers and reducing the company’s overall liquidity.

2. Rights of first refusal: Shareholders’ agreements may include a right of first refusal, which gives existing shareholders the first opportunity to purchase shares before they are offered to outsiders. This can create uncertainty for potential buyers, who may be hesitant to invest in a company where the terms of the sale are uncertain, even if they are buying 100% equity interest.

3. Drag-along and tag-along rights: Shareholders’ agreements may include drag-along rights, which allow a majority shareholder to force the sale of their shares along with the company, and tag-along rights, which allow minority shareholders to join in the sale of their shares. These rights can impact the company’s value, as they can affect the ability of potential buyers to acquire a controlling interest in the company.

4. Voting and governance rights: Shareholders’ agreements may include provisions that grant certain shareholders special voting or governance rights, which can affect the control and management of the company and its future prospects. For a potential buyer, these rights can affect the company’s value by limiting the buyer’s ability to control the company’s direction.

5. Exit clauses: Shareholders agreements may include exit clauses such as buy-sell provisions, which can affect the terms and conditions under which shareholders can exit the company and the price at which they can sell their shares. Even if a buyer is acquiring a 100% equity interest, these clauses can affect the company’s value by limiting the buyer’s ability to exit the company in the future.

It’s important to note that these are just a few examples of how a shareholders’ agreement can impact a company’s valuation, and there are many other ways in which a shareholders’ agreement can affect the value of a company. It’s crucial for the valuator to understand the terms of the agreement and how they may affect the company’s future performance, even if the valuation is for a 100% equity interest.

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