When we talk about buyback agreements, we often talk about what those agreements are, what transfer events they cover, why agreements need to be updated when your shareholders and businesses are developing and changing, and how decisions can change as to whether buybacks are mandatory or optional. Let`s talk about a critical component of the buyout agreements, business valuation and the three most common valuation methods. When creating or verifying a buyout contract, there are no one-time valuation rules. The right choice depends on shareholders` goals – and what is right today may not be the right tomorrow. Contact us today for help on this issue. We`ll be happy to help. The buy-sell contract can also be structured to vary depending on the trigger purchase event. The agreement can provide for, for example. B, that in the event of a shareholder`s death, the purchase price is determined on the basis of fair value determined by a third-party valuation, which is consistent with the definition of the declaration value of inheritance tax. In addition, the agreement may provide that the purchase price is based on book value in order to prevent the transfer of shares to an independent third party. A strong buyout agreement can help tightly managed companies avoid disruptions when a shareholder leaves the company. Perhaps the most important provisions of a repurchase agreement are those that deal with valuation issues. Incomplete or outdated valuation rules can lead to costly and bitter litigation that harms both individual shareholders and the company.
Another method of evaluation is to use a formula to determine the value of the business in the event of a transfer. The formulas are very different, but they can generally be categorized into three categories: similarly, the buy-sell agreement should specifically define the “standard” of value in order to avoid litigation during the buyback process. A business valuation expert can provide definitions for a wide range of relevant standards, including fair market value, fair value, book value and investment value. Different trigger events or outgoing shareholders may require different levels or value standards. The cases and issues we are debating here underline the complexity of the buy-back agreement. Many factors should be addressed in the repurchase agreement: triggering events, purpose and method of evaluation, to name a few. The important thing in this regard is to reflect on the ultimate goal of buy-selling and the explanation of the importance of this document to clients at the time of development. For more information on buy-and-sell agreements as part of business valuation and teleconferences, visit the Business Valuation Resources website: www.bvresources.com.
You can also purchase a copy of Mercer`s book, buy-sell agreements, via Business Valuation Resources or on the Mercer Capital website: www.mercercapital.com. In all cases, agreements should provide for a reassessment after the initiation of a trigger event when the most recent assessment is longer than a specified period. If you receive assistance in developing a buyout contract for your business, contact SWBC`s business advisors. Valuation analysts are often involved in assessing narrow business interests under shareholder buy-back agreements and may participate in advisory contracts relating to the development of certain provisions of these agreements. Sale-to-purchase agreements generally vary depending on their nature and complexity, and stakeholders should consider several valuation factors when defining these agreements. As noted above, repurchase agreements generally contain an valuation clause with the terms of the buyout and often a definition of value. “Fair value” and “fair market value” are two commonly used definitions of value, but they are distinct and different concepts of art.