Business valuation and buy-sell agreements
The NY Times tackles a very important topic for today’s business owner: what to do when partners want to split. A buy-sell agreement protects all owners in a business for events when a minority, majority or equal owner decides or is forced to leave a business. In most cases, a buy-sell agreement will include a provision for determining “fair market value” via a credible third-party business valuation.
If you own a business and share that ownership with other partners, it is important that you create measures to protect everyone’s best interests in the form of a buy-sell agreement. Seek your attorney for such matters so that it is fair, carries goodwill and is responsible to all shareholders within your business. In the absence of a buy-sell, ownership claims and buyouts are at jeopardy in most cases leading to litigation and exorbitant legal fees with few winners in the end.
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7 Comments on Business valuation and buy-sell agreements »
Harry Hvostov @ 2:18 am:
It is worth noting that, as with any business appraisal, business valuation for buy-sell purposes should be repeated regularly.
An annual review of business appraisal results works for many small businesses and professional practices.
WGeden @ 11:22 pm:
Harry,
If the buy-sell agreement has a set price, not a pre-determined formula designated, can the set price be found to be too low?
FMV @ 10:28 am:
WGeden - you should seek legal counsel on this one. The point of a business valuation is to determine the value of a business at that point in time (historically, present day, and in the future). Significant changes in business will impact value, positively or negatively. A buy-sell agreement with a “set price” seems strange as it relates to FMV. If this is in question, an attorney should be able to review the agreement and give you sound advice.
WGeden @ 8:03 pm:
My lawyer thinks a predetermined(actual dollar figure per share in buy sell agreement) will not be enforcable since there were no provisions for value adjustments over an eight year period. An arbitrary figure does not represent full and adequate consideration for tax purposes and the shareholder ?????? Any comments?? Help!
FMV @ 11:45 am:
WGeden -
Your attorney sounds correct one this one. Trying to use a per share price from eight years ago will have little relevance of today’s market value if there have been significant changes in the performance of your business. Conducting an independent, third party business valuation is your best course of action. An arbitrator or judge would most likely make such a recommendation if your issues went to such deciding parties. Cash flow, owner(s) salaries & benefits/perks, assets, and many other factors will greatly change of a 8 year period (for the better or worse); thus value is not a constant over a considerable period of time.
Harry Hvostov @ 2:32 am:
A bit of clarification seems in order here:
A buy-sell agreement can specify the methods to be used to determine the business value.
However, as I mentioned earlier, business valuation needs to be repeated regularly to be relevant.
To sum up:
The application of the same valuation methods per buy-sell agreement is fine. Regardless of the methods chosen, business value needs to be re-visited on a regular basis to stay current.
Incidentally, a key part of a professional business appraisal report is the Date of appraisal.
appraisers @ 11:58 am:
Look at tax returns. Base the valuation on the actual income or loss that the business made based upon the tax returns that have been filed. Look at the last three years to look for a trend.
You also need a list of assets that belong to the business and the date the major assets were purchased.
You need a copy of all lease agreements.
You also need a list of all assets and all liabilities.