Many businesses today have Buy Sell Agreements. Simply put, a Buy Sell Agreement is a legally binding agreement that specifies what will happen if a shareholder dies or leaves the business for any reason, voluntary or involuntary. But what seemed to make sense years ago when the Buy Sell was first conceived may have unexpected consequences for a business owner, or the business owner’s spouse, later down the line. Many Buy Sell Agreements have a provision that sets a value for the business in the event of the divorce of a shareholder based on a pre-determined formula. Often, that formula results in a value that is dramatically different from the “real” value of the business. For example, the Buy Sell may set the value of the business at book value of the assets less liabilities. While this is a simple formula to implement, it is rarely indicative of the true earning potential of the business and almost always ends up valuing the business at a fraction of its true value. Even worse, it often causes expensive legal fees and time-consuming delays as both sides argue about whether the Buy Sell methodology is “equitable” or not. Case law is murky on this issue; sometimes the Court upholds the Buy Sell value and sometimes it does not.
A better way to do a Buy Sell Agreement, and one that may end up saving lots of time, money, and attorney’s fees, is to use a provision that simply says that in the event of a triggering event (sale, divorce, death of a partner, etc) the company will get an independent valuation of the business by a certified valuation professional. This result will be much more likely to get both parties to an equitable result with less time and expense.
Valuing a business can be confusing, especially when you are dealing with things like Buy Sell Agreements. IF you need help, call an experienced valuation professional like Scott Abels, CPA/CVA or visit us at Precisionvalsvcs.com.