Business Valuations for Buy-Sell Agreements
A buy-sell agreement is a legally binding document that determines how a partner or shareholder in a closely held business may purchase the interest of another partner or shareholder who withdraws from the business. Integrating a business valuation into a buy-sell agreement is often critical to ensuring that all shareholders are treated fairly and equitably if one executes the agreement. Likewise, the absence of a buy-sell often triggers a valuation during partnership disputes.
Buy-Sell Valuation Scenarios
Some of the most common scenarios include:
- Buy-Sell Requires a Valuation. In many agreements that documents call for an independent, third party valuation. (Think it might save some money to just include a pre-defined formula and skip the valuation? This might scare you straight).
- No Buy-Sell Agreement. Often times we wind up working to establish value when one shareholder wants out of a partnership. Those situations can be either friendly or litigious.
There are many types of events that trigger the need for a valuation amongst shareholders. Those may include:
- Shareholder disputes
- Death of a shareholder
- Insurance requirements
With regards to valuations of these types, our engagement is often guided by the terms laid out in the agreement when one exists. For instance, does the agreement provide for the application of Discounts for Control and Marketability? In other cases we are calculating value on a control / marketable basis regardless of the characterisitcs of the block of shares valued.