February 8th, 2011 by Brian Bornino
1. Valuation formulas don’t work…period. There is no formula that can take into account all factors that impact the value of a business. Your buy-sell agreement should not contain a purchase price based on a formula clause.
2. Clearly define all valuation language in the agreement. We’ve seen way to many fights about whether valuation discounts apply or not, whether we should be looking at fair market value or book value, etc.
3. Involve all shareholders in the process. All shareholders should understand their buy-sell agreement and have a good feeling about how shares will be valued upon a triggering event.
4. Get independent valuations regularly. It is much easier to value companies before there is a “triggering event” or a dispute. Further, shareholders will feel at ease knowing and understanding how their shares will be valued when it’s time to cash in. Spend a little time and money with a high quality valuation practice…it will definitely be worth the investment.
5. Write one! Every company with more than one shareholder should have a buy-sell agreement. Call a good corporate attorney and get an agreement drafted today!
Buy-sell agreements can serve an important role in ensuring smooth shareholder transitions and preserving business continuity…if they are developed and administered correctly. Alternatively, these agreements can be ticking time bombs that cause costly disputes, uncertainty, and frustration. Like we say in our seminar, “Address now or distress later”!