Understanding Your Buy-Sell Agreement – Part 4
Written by Dalton Hopper, CVA, CFE
In our previous articles, we discussed items to consider including in your buy-sell agreement, as well as how to determine your business’ value, and what triggering events may occur for your business. Now, we will discuss who can help you determine the value of your business.
As we have discussed, some agreements may have valuation provisions based on a formula approach or an agreed-upon value, while others require an appraisal or business valuation upon a triggering event. In the latter cases, buy-sell agreements are sometimes vague when outlining who should determine the value of the business. We recommend that a valuation professional with experience valuing businesses and interpreting buy-sell agreements be engaged. At the very least, the agreement should outline the qualifications of a valuation professional. The IRS has published guidance on the requirements it deems necessary to be considered a qualified valuation analyst. That guidance can be found here.
Some buy-sell agreements necessitate that one, two, or even three business valuators be involved in determining the company’s value. One factor to consider with this approach, however, is that there will almost certainly be differences between the values the analysts reach. This can lead to indecision about what price to set in the case of a sale, or worse, litigation over the differences in value. We recommend that the parties agree on a qualified, independent business valuator and obtain a valuation of the business regularly (every one to three years) so owners are aware of the current or recent value of the business. An added bonus to this approach is that any unintended consequences of the buy-sell agreement can be identified and resolved prior to any triggering events occurring.
If you are unsure of who to engage to value your business, our team of Certified Valuation Analysts would be happy to sit down with you to discuss your options to help provide insight and peace of mind. Contact our office at (833) CPA-BMSS or visit our website.
The information provided in this series does not, and is not intended to, constitute legal advice; instead, all information and content in this series are for general informational and business purposes only. Please contact your attorney to obtain advice with respect to any particular legal matter, including a comprehensive discussion of other provisions that might be advisable in a buy-sell agreement.