A buy-sell agreement can be an important tool in smoothing any business ownership transition, whether the aim is to maintain control, provide liquidity and a ready market for the stock, retain key employees or ensure an orderly ownership transfer in the case of death, disability or divorce. Of course, it’s important to decide how to fund the agreement (for instance, via life insurance, disability insurance or a sinking fund). But at the heart of every successful buy-sell agreement is a well-reasoned, supportable value.
One of the leading causes of disputes in buy-sell agreements is their failure to provide valuation guidelines and define key terms such as:
- Standard of value. Too often, buy-sell agreements merely state that the buyout price is the value of an interest in the business. But “value” can mean different things in different contexts, so the agreement needs to spell out whether the price should be based on fair market value, fair value, investment value or some other standard.
- Valuation date. All appraisals value a business or business interest as of a certain point in time, and the valuation date can have a big impact on the conclusion of value. The agreement should specify whether the date used is the date of the triggering event, the last day of the company’s most recent fiscal year or some other date. Using a specific date, rather than the date of the triggering event, discourages owners from timing their departures to maximize the buyout price.
- Other considerations. Federal estate taxes are another important consideration, especially when a family business is involved. Buy-sell valuation provisions are generally enforceable in the courts, but the IRS might not accept the buyout value for estate tax purposes, unless the parties can show, among other things, that the valuation provision is comparable to one negotiated at arm’s-length by unrelated parties.
In addition to maintaining corporate harmony, an independent valuation can also help partners and/or investors avoid legal battles. Objectively derived company stock values stand up well under IRS and court examination. By planning for all possible contingencies and incorporating reasonable, clearly defined valuation guidelines, you can help ensure a smooth transition at a difficult time.
How can American Business Appraisers Help?
Professional valuation services increasingly are favored in buy-sell agreements because shareholders must agree on a valuation firm’s qualifications and independence. The resulting valuation under the agreement will be objective and independent of any individual shareholder’s interests, and therefore fair to all shareholders.
Every individual situation is different and not everyone requires our appraisal services and sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.