Normally shareholder agreements or buy sell agreements are written by the majority shareholder's very smart and experienced attorney and are totally favorable to the majority shareholder/Corporation. The minority interest shareholders are required to sign these agreements and often do not understand all the implications of what they are signing until it is too late. I will define too late as when they are trying to exit the business and get a liquidity event at a value that is reasonably close to the value of the company multiplied by their percentage ownership in the company.

There are several approaches that we see used in determining the Purchase Price for shares of selling shareholders. The most common is Net Book Value. What net book value means is that you take all the assets and subtract all the debts and you get the shareholder equity or net book value. To the untrained observer that would seem fair and logical. In reality, it is simply an accounting presentation and generally has no relationship to what the business is really worth. An example is a company that owns a prime piece of real estate for their factory and the neighborhood has become hot. That facility was acquired in 1968 for $2 million with half of the value in the building and half in the land. The building has been depreciated down to $400,000 and the land stays on the books at $1 million. A fair market value of the facility is now $8 million and yet its net book value is recorded at $1.4 million.

Another weakness in this approach (for the minority, not the majority shareholders) is that there is no value placed on the going concern or the good will. Let's say you are software company with 300 installed accounts, a cutting edge application and are growing at 30% per year. They might have 10 depreciated servers, some used office furniture and virtually no other hard assets. Their book value is $87,000. The true fair value for the company, according to a strategic buyer who may really want this company might be $25 million. The book value is not even in the same zip code as the true value of the business.

Sometimes the parties agree on an approach that is based on an appraisal from a qualified valuation firm. If you are a minority holder you are beaten before you have even started. Standard valuation practice allows for a