Pricing a Partner or Key-Employee Buy-In

Executive Summary

A charter operator or maintenance shop reaches a point where it wants to keep the person who makes it run. The chief pilot who holds the customer relationships, the director of maintenance who holds the repair-station approvals, the general manager who holds the whole operation together: at some stage the owner offers one of them equity, and someone has to put a price on the stake. That price is not a negotiation to be split down the middle. It is a valuation problem with a specific structure, and getting the structure wrong creates a tax bill for the employee, a fairness dispute among the owners, and, if the deal is ever examined, an exposure the company did not intend.

The structure has three layers. First, the operating value of the business as a whole, the control-level enterprise or equity value from which everything else descends. Second, the adjustments that convert a proportionate share of that whole into the value of the specific minority stake being sold: a discount for lack of control, because a minority owner cannot direct the company, and a discount for lack of marketability, because there is no ready market for shares in a closely held aviation firm. These two discounts compound rather than add, and for a small minority interest they commonly combine into a twenty to fifty percent reduction off the pro-rata figure. Third, the tax overlay, because when an employee buys equity for less than its fair market value in connection with services, the bargain element is compensation income under Section 83 of the Internal Revenue Code, which means the discount analysis is not only a fairness exercise but the very thing that sizes the employee’s tax.

This paper works through all three layers in the aviation setting, where two facts shape everything: neither the Part 135 air-carrier certificate nor the Part 145 repair-station certificate can be sold on its own, so value moves only with the equity of the certificate-holding entity, and the choice of entity form determines whether the buy-in can be structured tax-efficiently at all. It closes with the problem that makes this a recurring engagement rather than a one-time favor: as the owner brings in a second and third key employee over the years, each buy-in must be priced consistently with the last, which is exactly the discipline a well-drafted buy-sell agreement and a standing appraisal relationship provide.

1. The Buy-In as a Valuation Problem

The instinct in a closely held company is to price a key-employee buy-in by feel: a round number, a multiple of salary, a figure the owner and the employee can both live with. The instinct is understandable and almost always wrong, for two reasons that compound. A minority stake in a private company is worth materially less than its proportionate share of the whole, so a price set at the pro-rata figure overpays and a price set below the true minority value creates a taxable bargain. And because the buyer is an employee acquiring the equity in connection with services, the tax code does not treat the transaction as an ordinary purchase; it measures the price against fair market value and taxes any shortfall as compensation. The number therefore has to be defensible, not merely agreeable.

The right way to see the engagement is as a descent through defined levels of value. The appraiser establishes the operating value of the business at the control level, takes the buyer’s proportionate share of it, and then reduces that share to reflect what the buyer is actually getting: a non-controlling, non-marketable interest. The reductions are the discount for lack of control and the discount for lack of marketability. Each is grounded in empirical study and professional standards rather than in the parties’ preferences, and each has to be supported in a way that survives review by a co-owner, the IRS, or a court. The remainder of this paper builds that descent one step at a time, then adds the tax and entity-form overlays that are specific to a buy-in, and finally addresses the fact that the aviation owner will do this again.

2. Start With the Operating Value

Every discount in this paper is a percentage of something, and that something is the operating value of the business at the control level. Get the base wrong and no amount of discount precision rescues the answer. For an aviation services company the base is developed the same way it would be for any operating business, through the income, market, and asset approaches, but the value drivers and the risks that shape the multiple are particular to the sector.

2.1 Charter and aircraft management (Part 135)

An on-demand charter or aircraft-management company is valued principally as a going concern on its earnings, typically a multiple of EBITDA or, where aircraft are leased, EBITDAR that adds back rent to make operators with different fleet-ownership models comparable. Published rules of thumb for private-aviation businesses cluster in a broad band, on the order of four to eight times EBITDA for a general operator and higher for larger or premium operators, with one 2025 aerospace survey reporting private-aviation multiples rising from roughly six times at one to three million dollars of EBITDA to about twelve times at the fifteen-million-dollar level. These figures are marketing-grade rules of thumb, not transaction-database comparables, and should be treated as a sanity check on a properly built income approach rather than as the valuation itself.

What moves a charter operator’s value off the middle of that band is a short list of sector-specific factors. Fleet structure matters most: an asset-light management model that flies owners’ aircraft under management agreements behaves like a service business, while an owned or long-term-leased fleet adds asset value but also capital intensity and residual-value risk. Utilization, measured in block hours and revenue per aircraft, drives margin. And two concentration risks are chronic in this business and depress value directly: customer concentration, where a handful of accounts or a single fractional program carries the revenue, and pilot and key-person concentration, where the chief pilot, director of operations, or director of maintenance embodies relationships and approvals that would be difficult to replace. The very fact that the company is offering equity to a key employee is often a sign that this dependence is real, and the appraiser should reflect it in the base value before any minority discount is layered on.

2.2 Maintenance, repair, and overhaul (Part 145)

An MRO is valued on similar principles, with stable maintenance shops often benchmarked near one times revenue and specialized or high-margin shops, such as avionics, toward the top of the EBITDA range, plus the asset value of tooling and facilities. The value drivers are the repair-station certificate and its specific ratings, any OEM authorizations, specialized tooling, the hangar and facility, the order backlog, the skilled technician workforce whose scarcity is both an asset and a retention risk, and aircraft-on-ground capability that commands premium margins. As with charter, workforce and certification concentration are the recurring risks, which is again why the person being offered equity is frequently the person who holds those approvals together.

2.3 The certificate is not for sale on its own

One structural fact governs both sectors and shapes the buy-in directly: neither the operating certificate can be transferred by itself. A Part 135 air-carrier certificate is not an asset of the company that can be sold individually, and the FAA repair-station rule is explicit that if a Part 145 certificate holder sells or transfers its assets and the new owner wishes to operate as a repair station, the new owner must apply for its own amended or new certificate. The practical consequence is that value in these businesses is captured by acquiring the equity of the certificate-holding entity, not its assets, because an asset sale forfeits the certificate and forces a months-long recertification. That is why a buy-in is almost always a purchase of equity in the operating company itself, and why the certificate, the operating specifications, and the approvals are part of the going-concern value the appraiser is dividing.

Table 1. Aviation operating-value drivers and certificate transferability

Multiples are marketing-grade rules of thumb for cross-checking a properly built income approach, not transaction-database comparables.

3. The Levels of Value

With the control-level operating value established, the appraiser moves down a defined ladder. Professional practice recognizes discrete, reportable levels of value, and the appraiser must state which one the conclusion represents. At the top sit the control levels, sometimes split between a strategic-control value that includes buyer-specific synergies and a financial-control value that does not. Below them is the marketable-minority level, the value a small interest would have if it traded freely like a public share. At the bottom, and this is where a key-employee stake almost always lands, is the nonmarketable-minority level, the value of a small interest in a company whose shares do not trade at all.

The distance between the control level and the nonmarketable-minority level is bridged by the two discounts that are the heart of this paper. The discount for lack of control carries value from the control level down to the marketable-minority level, reflecting that the holder cannot direct the enterprise. The discount for lack of marketability carries it further down to the nonmarketable-minority level, reflecting that the holder cannot readily sell. A sub-fifty-percent position is generally a noncontrolling interest, though the percentage alone is not dispositive; governance terms, voting arrangements, and any swing-vote dynamics can raise or lower the degree of control a particular block actually carries. The appraiser’s job is to identify where on the ladder the specific stake being sold belongs and to size each step down with support.

Table 2. The levels of value and the discounts that bridge them

4. The Discount for Lack of Control

A minority owner cannot do the things that make control valuable. Control confers the ability to set strategy and compensation, declare distributions, hire and fire, enter or block a sale of the company, and determine the timing of a liquidity event. A ten or twenty percent holder in a charter company has none of these powers; the holder receives distributions if and when the controlling owner declares them and exits when the controlling owner permits. The discount for lack of control, also called the minority interest discount, measures the value the buyer forgoes by not holding those prerogatives.

Its magnitude is not invented; it is derived from market evidence, principally control-premium studies that observe how much more acquirers pay for control of public companies than the pre-announcement trading price. The implied minority discount is the algebraic inverse of the control premium, computed as one minus the reciprocal of one plus the premium. A median control premium of 34.4 percent, for example, implies a minority discount of 25.6 percent, because paying 134.4 for control means the minority level sits at 100, a 25.6 percent step down from 134.4. One caution disciplines this arithmetic: acquisition premiums often include buyer-specific synergies that a financial minority buyer would never realize, so the appraiser should work from financial-control rather than strategic-control premiums when deriving the discount, or the minority discount will be overstated.

5. The Discount for Lack of Marketability

Even a controlling interest in a private company is harder to sell than a public share; a minority interest is harder still. The discount for lack of marketability captures the reduction in value that comes from the absence of a ready market, the time and cost required to find a buyer, and the risk borne while illiquid. For a minority stake in a closely held aviation company with a restrictive buy-sell agreement, it is typically the larger of the two discounts.

The empirical foundation comes from two families of studies. Restricted-stock studies compare the price of otherwise-identical public shares that carry a temporary resale restriction against their freely traded counterparts; their observed discounts have historically clustered in roughly the twenty to thirty-five percent range, and the IRS’s own discount-for-lack-of-marketability job aid reports central tendencies near thirty-one to thirty-three percent, which is why many analysts anchor around thirty-five percent before adjusting. Pre-IPO studies, which compare private-transaction prices to the later public-offering price, show larger discounts in the thirty to sixty percent range, though the Tax Court largely rejected mechanical reliance on the pre-IPO approach in McCord v. Commissioner before partially crediting it again in later cases. A responsible appraiser treats these studies as a starting range, not a lookup table, and notes that the restricted-stock evidence itself shifted after the SEC shortened the Rule 144 holding period, which compressed the discounts.

The bridge from the study range to the specific interest is the set of factors identified in Mandelbaum v. Commissioner, which the IRS job aid adopts. The ten Mandelbaum factors include the company’s private-versus-public sale history, its financial statements, its dividend or distribution policy, its nature and history, the quality of management, the degree of control transferred, transfer restrictions, any required holding period, the redemption policy, and the cost of a hypothetical public offering. A buy-sell agreement bears directly on three of these: it imposes transfer restrictions, it can effectively fix a holding period until a triggering event, and it establishes the redemption policy. This is the point most owners miss. A buy-sell agreement drafted to protect the company by restricting transfer also, as a matter of valuation logic, increases the marketability discount on every minority stake it governs, which lowers the price at which those stakes should change hands.

Table 3. Empirical basis for the marketability discount

6. Stacking the Discounts: A Worked Example

The two discounts do not add; they compound, because the marketability discount applies to a value that has already been reduced for lack of control. Applying a thirty percent control discount and then a twenty percent marketability discount does not yield a fifty percent reduction but a forty-four percent one, computed as one minus the product of the two surviving fractions. The order of operations is the descent through the levels of value: start from control equity value, take the buyer’s pro-rata share, apply the control discount to reach the marketable-minority level, then apply the marketability discount to reach the nonmarketable-minority level.

Consider a charter company whose control-level equity value is appraised at $12,000,000, offering a general manager a ten percent stake. The mechanics run as follows.

Table 4. Illustrative buy-in price for a 10% stake (control equity value $12,000,000)

Discount percentages are illustrative; each must be supported for the specific interest. The combined 44% reduction is 1 − [(1 − 0.20) × (1 − 0.30)], not 0.20 + 0.30.

The concluded value of $672,000 is $528,000 below the $1,200,000 pro-rata figure, and that gap is the entire point of the analysis. It is the difference between what the stake is proportionately worth and what it is actually worth to a buyer who cannot control or readily sell it. It is also, as the next section explains, the number that determines the employee’s tax, which is why the discounts must be defensible rather than convenient.

7. Which Standard of Value Applies

The discounts above belong to a specific standard of value: fair market value, the price a hypothetical willing buyer and willing seller would agree on, as elaborated in Revenue Ruling 59-60. That is the correct standard for a buy-in priced as an arm’s-length transaction and for the tax analysis that follows, and under it the control and marketability discounts are not only permitted but required to reflect the nature of the interest. The appraiser should state the standard explicitly, because a different standard changes the answer.

The standard that most often collides with a buy-in is statutory fair value, the standard that governs dissenting-shareholder and oppressed-minority proceedings. In most jurisdictions fair value entitles a minority holder to a proportionate share of the going concern without the lack-of-control and, usually, the lack-of-marketability discounts, on the theory that a minority owner forced out should not bear discounts for a illiquidity the majority imposed. The treatment is not uniform; a minority of states permit a marketability discount even under fair value, and the case law continues to move, so the governing state’s statute and decisions must be checked rather than assumed. The practical lesson for the owner is that the same ten percent stake can carry two very different values depending on why it is being valued: a discounted fair-market-value figure when an employee buys in voluntarily, and a higher, often undiscounted fair-value figure if that same employee later leaves and litigates. A buy-sell agreement that fixes the standard of value and the discount treatment in advance is the cleanest way to keep the two from being confused.

8. The Section 83 Overlay and the Choice of Entity

Because the buyer is an employee acquiring equity in connection with services, the transaction is not taxed as an ordinary purchase. Under Section 83 of the Internal Revenue Code, if the employee pays less than the fair market value of the equity, the shortfall, the bargain element, is ordinary compensation income. This is the hinge that connects the valuation to the tax: the fair market value against which the price is measured is the discounted, nonmarketable-minority value the appraiser concluded, so a well-supported discount does double duty, lowering both the fair price and the taxable bargain element. In the worked example, an employee who pays the concluded $672,000 recognizes no compensation income; an employee allowed to pay $500,000 for the same stake recognizes $172,000 of ordinary income, because the equity was worth $672,000.

Two mechanics recur. Where the equity is subject to vesting or a substantial risk of forfeiture, the employee may file a Section 83(b) election within thirty days of the grant to be taxed on the spread at grant rather than at vesting, fixing the compensation income at today’s value, starting the capital-gains holding period, and converting future appreciation to capital gain; the election is now made on IRS Form 15620. And where a permanent formula or book-value resale restriction applies, that non-lapse restriction is taken into account and its formula price is treated as the fair market value, which is one way a buy-sell formula can control the tax result. The election is a hard thirty-day deadline with no extensions, and if the equity is later forfeited the tax paid is not refunded, so it is a considered choice rather than a reflex.

Entity form determines how much of this is even a problem. In an LLC or partnership, the owner can grant the key employee a profits interest, an interest in future profits and appreciation only with no claim on existing capital, which under Revenue Procedures 93-27 and 2001-43 is generally not a taxable event at grant at all, avoiding the bargain-element issue entirely; requiring the employee instead to buy a capital interest triggers Section 83 on any below-value element. An S corporation cannot offer that flexibility: its single-class-of-stock rule forbids the preferred returns and disproportionate distributions a profits interest implies, its shareholder-eligibility rules bar many holding structures, and even its buy-sell terms must avoid creating a second class of stock. A C corporation avoids the single-class constraint but reintroduces entity-level tax. The entity form the owner chose years ago, in other words, quietly sets the menu of buy-in structures available today.

Table 5. Entity form and the key-employee buy-in

9. The Repeat Buy-In: Consistency Over Time

The reason this is a standing engagement rather than a one-time task is that an owner who brings in one key employee usually brings in others, over years, as the team grows and the first cohort proves the model. Each successive buy-in has to be priced on the same principles as the last, or the owner creates both resentment and tax risk: an employee who bought in at one implied value will not accept a materially different basis for the next colleague without explanation, and inconsistent pricing invites a challenge that some buy-ins carried a disguised bargain element. Consistency is not sameness of number, because the business value changes between transactions, but sameness of method: the same standard of value, the same approach to control and marketability discounts, and the same valuation date convention applied each time.

The instrument that enforces this is the buy-sell agreement, and its design choices are the recurring-engagement questions. The agreement should specify whether price is set by a fixed formula or by independent appraisal; a formula is cheap and predictable but drifts from reality and can misstate value badly as the company changes, while an independent appraisal is more defensible and satisfies the tax standards more comfortably, at the cost of a recurring fee. It should fix the valuation date and the standard of value, so that a departing owner cannot argue for an undiscounted fair-value figure when the deal contemplated discounted fair market value. It should set the put and call rights and the leaver provisions that distinguish a good leaver, bought out at appraised value, from a bad leaver, bought out at cost or book. And it should address financing, because a key employee rarely has the cash: the buy-in is often funded by a seller note carried by the owner or by a bonus structured to fund the purchase, each of which has its own tax character that should be coordinated with the Section 83 analysis rather than left to chance.

One further constraint governs whether the agreed price will be respected for transfer-tax purposes if an owner later dies or gifts an interest. Under Section 2703 of the Internal Revenue Code, a buy-sell price below fair market value is disregarded for estate and gift valuation unless it is a bona fide business arrangement, is not a device to transfer value to family for less than full consideration, and has terms comparable to arm’s-length arrangements among unrelated parties, with a safe harbor where more than half the entity is owned by unrelated parties. Among unrelated co-owners, which is the usual key-employee situation, the safe harbor typically applies, but the arm’s-length standard still argues for pricing by appraisal rather than by a stale formula. This is where the present paper rejoins the transfer-tax paper in the series: the same buy-sell agreement that prices a living employee’s buy-in also fixes, or fails to fix, the value that will be used when an owner’s interest passes at death.

10. Practitioner Guidance

The analysis reduces to a short sequence an appraiser, owner, or advisor can apply to any key-employee buy-in, and repeat as the next one arrives.

Value the operating business first, at the control level, using income and market approaches suited to the sector, and reflect customer, pilot, and certification concentration in the base value before any minority discount.

State the standard of value explicitly as fair market value for a voluntary buy-in, and identify the level of value concluded as the nonmarketable-minority interest.

Derive the discount for lack of control from financial-control premium data, stripping out synergies, rather than adopting a rule-of-thumb percentage.

Support the discount for lack of marketability with the restricted-stock and pre-IPO evidence as a range, then bridge to the subject with the Mandelbaum factors, giving explicit weight to the buy-sell agreement’s transfer restrictions.

Apply the discounts multiplicatively to the pro-rata share, show the arithmetic, and reconcile the concluded value against the sector rules of thumb as a sanity check.

Coordinate the price with the Section 83 analysis so the employee pays fair market value and avoids an unintended compensation charge, and consider a profits interest where the entity is an LLC or partnership.

Put the method, standard of value, valuation date, put and call rights, leaver provisions, and financing in a buy-sell agreement, and use consistent method and a standing appraisal relationship across successive buy-ins.

The recurring appraisal is not overhead; it is what keeps every buy-in defensible, every cohort treated alike, and the owner’s eventual estate valuation consistent with the deals made along the way. An owner who prices the first buy-in properly, and documents why, has built the template for the next ten, and has a reason to call the same appraiser each time.

Authorities and Sources

Valuation standards and guidance

AICPA Statement on Standards for Valuation Services, VS Section 100 (conclusion of value vs. calculated value).

ASA Business Valuation Standards (Feb. 2022), including BVS-VIII (levels of value) and PG-2; USPAP (The Appraisal Foundation); NACVA standards.

IRS Revenue Ruling 59-60 (fair market value factors for closely held stock).

IRS Discount for Lack of Marketability Job Aid (restricted-stock and pre-IPO studies; Mandelbaum factors); irs.gov/pub/irs-lbi/dlom.pdf.

Cases

Mandelbaum v. Commissioner, T.C. Memo 1995-255 (ten marketability-discount factors).

McCord v. Commissioner, 120 T.C. 358 (2003); Bergquist v. Commissioner (2008) (pre-IPO study weight).

Tax authority

IRC Section 83 and Treas. Reg. 1.83-1 through -5; Section 83(b) election (Form 15620); Rev. Rul. 2004-37, 2005-48.

Rev. Proc. 93-27 and Rev. Proc. 2001-43 (profits-interest grants); IRC Section 1361(b) (S-corporation eligibility and single class of stock); IRC Section 2703 (buy-sell agreements).

Aviation and market data

14 CFR 145.57 (repair-station certificate not transferable); FAA Part 135 air-carrier certification guidance.

Private-aviation and MRO valuation rules of thumb (First Page Sage aerospace multiples, 2025; DealStream aviation-service guide; Brookfield Aviation), used as sanity checks rather than comparables.

Companion papers

Aeronautical Valuation Research Series: the hangar transfer-tax paper (estate and gift), “Property-Tax Assessment of Aircraft Hangars,” and “Underwriting a Loan Against a Leasehold Hangar.” The buy-sell and Section 2703 analysis here connects directly to the transfer-tax paper.

Disclaimer. This paper is a research synthesis for valuation, tax, and legal professionals and is not valuation, tax, or legal advice. Discount magnitudes and multiples are illustrative and must be developed and supported for the specific interest and entity; empirical discount studies and market multiples are time-sensitive; and the treatment of discounts under the fair value standard varies by state. Entity form, the governing buy-sell agreement, current tax authority, and the applicable jurisdiction should be confirmed before any figure here is applied to a transaction.

This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement.