Why Selling Private Company Shares Is Nothing Like Selling Listed Shares

Selling shares in a listed company takes seconds. There is a market, a live price, and a buyer who never needs to know your name. Selling shares in a private company is the opposite of all three. There is no market, so the price has to be built from scratch. There is no automatic buyer, so one has to be found. And the company itself gets a say in whether the sale happens at all, because a private company is legally allowed to restrict who owns its shares.

That last point surprises most first-time sellers. In a private limited company, ownership is treated as a relationship rather than a commodity. The existing shareholders chose each other, and the law lets them keep control over who joins the group. So the real question for anyone planning an exit is not just “what are my shares worth” but “what am I actually permitted to do with them, and in what order”.

This article walks through the full sequence a professional advisory team would follow: fixing a defensible value, understanding the restrictions that apply, working out when an outside buyer can be approached, resolving the disputes that typically arise, and understanding why the shareholders agreement, the Memorandum of Association and the Articles of Association decide more of the outcome than the negotiation itself does.

Step One: Establishing a Defensible Value

Valuation is where most private share sales either succeed or collapse. The seller almost always starts from what the business feels like it is worth, and the buyer almost always starts from what the numbers can be made to support. A defensible valuation is one that a third party — a tax authority, a court, an incoming investor, a co-shareholder who feels cheated — can read and follow without needing to trust either side.

There are three recognised approaches, and a proper exercise usually applies more than one and then reconciles them.

The income approach values the business on the cash it is expected to generate. The most common version is the discounted cash flow method, where projected free cash flows over a forecast period are brought back to today’s value using a discount rate that reflects the risk of those cash flows, and a terminal value captures everything beyond the forecast horizon. This method suits profitable, stable businesses with a credible forecast. Its weakness is that it is extremely sensitive to assumptions — a one percent change in the discount rate or the long-term growth rate can move the answer by a fifth. That sensitivity is exactly why buyers and sellers argue over it, and why the assumptions should be stated openly rather than buried in a spreadsheet.

The market approach values the business by reference to what comparable businesses sell for. In practice this means applying a multiple — of earnings before interest, tax, depreciation and amortisation, or of revenue, or of book value — drawn from listed companies in the same sector or from recent transactions involving similar private businesses. The advantage is that it reflects what real buyers are actually paying. The difficulty is finding genuine comparables. A listed company with a professional board, audited accounts, diversified customers and easy access to capital is not truly comparable to a private company where one family holds every key relationship, and the multiple has to be adjusted downward to reflect that.

The asset approach values the business as the sum of its assets less its liabilities, with each item restated to current value rather than historical book cost. This is the right method for holding companies, property-owning entities, and businesses that are loss-making or being wound down. It is the wrong method for a profitable services business, where the value sits in relationships and people rather than in anything on the balance sheet.

Before any of these methods is applied, the financial statements need normalising. Private company accounts frequently carry owner-related items that a buyer would never inherit: above-market director remuneration, personal expenses run through the business, rent paid to a related party at a non-commercial rate, one-off legal costs, or income from an asset that is not being sold. Each of these is adjusted out so that the earnings being valued represent what the business genuinely produces on a standalone commercial basis. Skipping normalisation is the single most common reason a valuation gets torn apart in negotiation.

Two further adjustments matter enormously for private shares and are routinely forgotten. The first is the discount for lack of marketability, which reflects the simple fact that a private share cannot be sold quickly or cheaply. Depending on the company and the jurisdiction, this discount commonly falls in a broad range but is rarely trivial. The second is the minority discount — or, viewed from the other side, the control premium. A shareholder holding a small stake cannot appoint directors, cannot force a dividend, and cannot compel a sale of the business. That powerlessness reduces the per-share value relative to a controlling block. Conversely, if the parcel being sold hands the buyer control, a premium is justified. A valuation that prices a fifteen percent minority stake at fifteen percent of the whole-company value is, in most cases, simply wrong.

Finally, the valuation must have a clear valuation date and must state what standard of value is being applied — fair market value between willing and informed parties, fair value as defined in the shareholders agreement, or investment value to one specific buyer. These are different numbers, and confusing them causes disputes. In many jurisdictions the exercise must also be performed by a person with specific credentials for it to be accepted for tax or regulatory purposes, and the tax authorities may prescribe their own valuation formula that overrides commercial judgement for the purpose of calculating tax. It is entirely normal to end up with a commercial price and a separate regulatory floor or ceiling, and both need to be checked before signing.

Restrictions on the Sale of Shares

Once a value exists, the next question is whether the sale is permitted. In a private company the answer usually depends on documents written years earlier by people who were not thinking about today’s situation.

The most common restriction is the right of first refusal, also called a pre-emption right. It requires a selling shareholder to offer the shares to the existing shareholders before offering them to anyone else, usually in proportion to their existing holdings, and usually at the price a genuine outside buyer has offered or at a price fixed by a defined valuation mechanism. Only if the existing shareholders decline, or fail to respond within the stated notice period, may the seller proceed externally. A close variant is the right of first offer, where the seller must name a price to the insiders first and can only approach outsiders afterwards, and only at a price no lower than the one refused.

Board approval clauses are equally common. Many articles give directors discretion to refuse to register a transfer, sometimes without giving reasons. Until a transfer is entered in the register of members, the buyer is not legally a shareholder, regardless of what the sale agreement says or how much money has changed hands. A share sale can therefore be perfectly valid between buyer and seller and completely ineffective against the company.

Lock-in periods prevent any sale for a fixed number of years, typically imposed on founders after an investment round or on employees receiving shares. Permitted transferee clauses carve out exceptions, allowing transfers to family members, trusts or wholly owned entities without triggering the full pre-emption process. Prohibited transferee clauses work the other way, blocking sales to named competitors or to any party in the same line of business regardless of price.

Two clauses protect the other shareholders when a large block moves. Tag-along rights let minority shareholders join a sale on the same terms, so a majority holder cannot exit at a premium and leave the minority stranded with a new and unknown controller. Drag-along rights work in reverse, allowing a majority selling to a third party to compel the minority to sell too, so the buyer can acquire one hundred percent. A seller with a controlling stake needs to know whether tag-along rights will force them to carry passengers, and a minority seller needs to know whether they can be dragged out at a price they had no part in negotiating.

Beyond the private documents, external restrictions apply. Regulated businesses may need approval from a sector regulator before ownership changes. Cross-border sales frequently attract exchange control or foreign investment rules, which in many jurisdictions set a floor or ceiling on the price depending on whether the buyer or the seller is a non-resident. Loan agreements often contain change-of-control clauses that let a lender demand immediate repayment if ownership shifts. Key customer contracts and licences may contain the same trigger. In some jurisdictions, particularly where the entity is a limited liability company rather than a joint stock company, the transfer must be notarised and the constitutional documents formally amended and re-registered with the licensing authority before it takes effect at all.

When to Offer Shares to an Outside Buyer

The straightforward answer is: after the internal process has been genuinely exhausted, and strictly on terms no more favourable than those the insiders refused. But the timing question has a commercial dimension as well as a procedural one.

Procedurally, the seller issues a formal transfer notice to the company and the other shareholders, setting out the number of shares, the price and the material terms. The clock in the articles then starts running. If the existing shareholders accept in full, the sale completes internally and the external question never arises. If they accept in part, the articles determine whether the seller must sell the accepted portion or can withdraw entirely and sell the whole block outside — a detail worth checking before serving the notice, because being forced to sell half your stake and keep the rest is rarely the outcome anyone wanted. If they decline or let the period lapse, the seller becomes free to approach outsiders, typically for a limited window, after which the pre-emption process has to be repeated from the start.

The critical trap is the no-better-terms rule. If the shares were offered internally at one price and are then sold externally at a lower price, or with softer payment terms, or with a side arrangement that reduces the effective price, the pre-emption process has been undermined and the transfer becomes challengeable. Any material change in terms means going back to the shareholders first.

Commercially, there are good reasons to want an external buyer even when insiders are willing. Outside buyers set the true market price, whereas an internal buyer facing no competition has every incentive to argue the value down. A strategic buyer — a competitor, a supplier, a customer, or a private equity fund — may see value in the business that a co-shareholder does not, because they can combine it with something they already own. And where the relationship between shareholders has broken down, an external sale removes the seller cleanly instead of deepening an existing conflict.

The practical approach is to run both tracks in parallel where the documents permit it: obtain a genuine, documented offer from a credible outside party first, then serve the transfer notice at that price. This converts an argument about valuation theory into a simple choice for the insiders — match this real offer or let it proceed. It is by far the most effective way to prevent the price being talked down.

How to Solve the Problems That Actually Arise

Most private share sales run into the same handful of problems, and each has a known remedy.

The parties disagree on value. The standard solution is to appoint an independent expert whose determination is contractually final and binding, with the cost shared. A sharper mechanism is final-offer arbitration, where each side submits one number and the expert must pick one of them without splitting the difference — which pushes both sides toward realism, because an extreme number is certain to lose. Where the disagreement is about future performance rather than present facts, an earn-out bridges the gap: part of the price is paid upfront and the balance depends on the business hitting defined targets over a following period. Earn-outs need very precise drafting, because the buyer will control the business during the measurement period and can influence the outcome, so the seller needs protective covenants on how the business will be run.

The buyer discovers problems during due diligence. Undisclosed liabilities, tax exposures, disputed contracts and missing regulatory approvals emerge at this stage routinely. The remedies are price reduction, specific indemnities for identified risks, a portion of the price held in escrow for a defined period, or a condition requiring the issue to be resolved before completion. Sellers should carry out their own vendor due diligence first — finding a problem yourself is dramatically cheaper than having a buyer find it, because a discovery mid-negotiation costs you both the money and the credibility.

Existing shareholders block the transfer without buying. This is obstruction — refusing to purchase while also refusing to approve any outside buyer. Where the articles give directors absolute discretion this can be difficult to defeat, but most jurisdictions provide a remedy for conduct that is oppressive or unfairly prejudicial to a shareholder, and a pattern of blocking every buyer while making no offer is strong evidence of it. The practical route is usually a formal written demand documenting each refusal, followed by mediation, with litigation as the last resort because it is slow and destroys whatever relationship remains.

Nobody can agree and the company is deadlocked. Well-drafted agreements include a deadlock mechanism. Under a shotgun clause, one shareholder names a price at which they will either buy the other out or sell to them, and the other chooses which side of the transaction to take — a structure that forces an honest price, since naming a low number risks being bought out at it. Alternatives include a full sale of the business, a demerger separating the operations, or a buy-back of the departing shareholder’s stake by the company itself, which is often the cleanest exit when the remaining shareholders lack personal funds but the company holds cash.

The seller cannot find any buyer. Where no third party wants a minority stake in a private company, the realistic options are a company buy-back, a capital reduction, a sale to an employee ownership structure, or a negotiated instalment exit where the remaining shareholders acquire the stake over several years with security over the shares until paid.

Underlying all of these is the same principle: the remedy is far easier when the mechanism already exists in the documents. Deadlock clauses, valuation formulas and exit rights are cheap to draft at incorporation and extremely expensive to negotiate during a dispute, when both sides know exactly what they stand to gain by refusing.

Why the Shareholders Agreement, MOA and AOA Decide Everything

These three documents are the constitution of a private company, and understanding how they interact is the single most valuable piece of knowledge a shareholder can have.

The Memorandum of Association is the company’s foundational charter. It establishes the company’s name, its registered jurisdiction, its objects — the business it is permitted to carry on — the limit of shareholder liability, and the authorised share capital. It faces outward, defining the company’s identity and capacity to the world. For a share sale, the MOA matters in two specific ways. If the buyer intends to take the business in a direction the objects clause does not cover, the objects have to be amended. And in jurisdictions where the MOA lists the shareholders and their holdings — which is the norm for limited liability companies in several Gulf jurisdictions — the transfer is not merely recorded internally but requires a formal, notarised amendment to the MOA itself, filed with the authorities, without which the sale simply has not happened.

The Articles of Association are the internal rulebook. They govern how directors are appointed and removed, how meetings are called, how voting works, how dividends are declared, and — crucially — how shares are issued and transferred. Every restriction discussed earlier in this article lives or dies here. The articles bind the company, every current shareholder and every future shareholder automatically, without anyone needing to sign anything. That automatic binding force is what makes them so powerful.

The Shareholders Agreement is a private contract between the shareholders, sitting alongside the constitutional documents. It handles the commercial understandings that do not belong on a public register: how the founders will split responsibilities, what happens if one of them leaves or dies, which decisions need unanimous consent, non-compete obligations, information rights, dividend policy, and the detailed exit mechanics. Because it is private, it can be far more specific and far more commercially frank than the articles.

The relationship between the three is where people go wrong. A shareholders agreement binds only the people who signed it. If a shareholder transfers shares to someone who never signs a deed of adherence, that new shareholder is not bound by it — and neither, in most jurisdictions, is the company itself unless the company is a party. The articles, by contrast, bind everyone automatically. This means that a beautifully drafted right of first refusal sitting only in the shareholders agreement may give you a damages claim against the person who breached it, while the transfer itself proceeds and the new shareholder keeps the shares. The correct approach is to mirror every transfer restriction, pre-emption right, tag-along, drag-along and lock-in into the articles as well as the agreement, and to require every incoming shareholder to sign a deed of adherence as a condition of the transfer being registered.

Where the two conflict, the constitutional documents generally prevail as against the company, because the articles are a public document that third parties are entitled to rely on. Well-drafted shareholders agreements therefore contain a clause obliging the shareholders to vote to amend the articles to give effect to the agreement, and to exercise their votes so that the agreement’s terms are honoured.

For a seller, the practical instruction is simple: read all three documents before doing anything else. Before naming a price, before approaching a buyer, before signing a term sheet. The answer to “can I sell, to whom, at what price, and in what order” is almost always already written down. The negotiation happens inside those constraints, not around them.

Bringing It Together

A well-run private share sale follows a clear sequence. Read the constitutional documents and the shareholders agreement to establish what is permitted. Commission a properly reasoned valuation applying more than one method, with normalised earnings and appropriate discounts for lack of control and lack of marketability. Prepare the company for diligence and fix the obvious problems before a buyer finds them. Identify a credible buyer and obtain a documented offer. Serve the transfer notice correctly and observe the pre-emption process without shortcuts. Negotiate the share purchase agreement with attention to warranties, indemnities, escrow and any earn-out mechanics. Obtain the necessary regulatory, lender and board approvals. Complete the formalities — the transfer instrument, stamp duty, board resolution, update to the register of members, statutory filings and, where required, notarised amendment of the constitutional documents. Only when the register has been updated is the sale genuinely complete.

The sellers who achieve good outcomes are rarely the ones who negotiate hardest. They are the ones who understood the constraints before they started, brought a defensible number to the table, and left the buyer nothing unpleasant to discover.

This article is general guidance and not legal, tax or valuation advice. Company law, valuation requirements, exchange control rules and tax treatment vary significantly by jurisdiction and by the specific terms of each company’s constitutional documents. Obtain professional advice on your own facts before acting.