How do I value a partner's share in a privately-held S corp?
To reach a specific valuation, you need to analyze the company's core financial metrics and compare it to the industry. The valuation metrics used for similar public companies would be a great place to start as well as the metrics used for similar private companies that have been sold.
The financial metrics you may want to consider in your valuation method include book value, discounted cash flow, earnings, sales and cash flow multiples. Keep in mind that the type of financial metric(s) used largely depends on the industry.
In addition, you don't have to use just one metric to reach a valuation for the company -- a combination or a blended valuation method can work as well.
Another option is to hire an independent third party valuation analyst (appraiser) to review the company's net worth. Sometimes this is the best approach since the analysis will be completely independent. But, be sure to do a thorough background check on the individual and/or company providing the valuation services.
Separately, make sure you consult with a tax expert because these situations can become complicated and you will want to make sure that you put yourself in the best possible position from a tax standpoint as well.
Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys. His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.