Prepare for Valuation Issues in Your Buy-Sell Agreement

Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.

Issues, what issues? 

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute.

The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably. 

Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.

What are our protocols?

  • How “value” will be defined,
  • Who will value the business,
  • Whether valuation discounts will apply,
  • Who will pay appraisal fees, and
  • What the timeline will be for the valuation process

It’s
also important to discuss the appropriate “as of” date for valuing the business
interest. The loss of a key person could affect the value of a business
interest, so timing may be critical.

Are we ready?

Business owners tend to put planning issues on the back burner — especially
when they’re young and healthy and owner relations are strong. But the more
details that you put in place today, including a well-crafted buy-sell
agreement with the right valuation components, the easier it will be to resolve
buyout issues when they arise. Our firm would be happy to help.

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