NJ: 201.445.8711     NY: 516.305.1996

valuation 10

Business Valuation for Buy-Sell Agreement

Avoid Disputes with a Buy-Sell Agreement

Many shareholder disputes often could have been resolved before entering litigation
had the owners drafted a buy-sell agreement.
Valuation experts can play an instrumental role in helping owners and their
attorneys draft provisions in buy-sell agreements that can be extremely
valuable in resolving disputes and minimizing the likelihood of lengthy and
expensive court battles.

Key provisions of buy-sell agreements may describe the situations in which a shareholder
is allowed or required to buy out the shares of another shareholder and outline how the
value of said shares should be determined. Establishing mechanisms to determine share
value is particularly important, as arguments over pricing issues can prolong litigation.
These mechanisms may come in the form of an agreed-upon-value, a valuation formula,
or a set of guidelines for hiring a third-party valuation professional.

If the agreement calls for a third-party appraisal, it should also specify business
valuation components, such as standard and premise of value, the valuation date,
and the use of valuation discounts. Each of these components, when applied
inconsistently,  can have a significant impact on the resulting conclusion of value and
having them clearly defined can minimize the likelihood of a dispute over share value.
Even if a dispute does enter litigation, the terms of the buy-sell agreement could be
upheld by the court. When parties do not have a buy-sell agreement with these
valuation components specified, shareholder disputes can be dragged out due to the
complex statutes and case law surrounding them.

A buy-sell agreement can provide a mechanism for a business or one of its owners to
acquire the interest of a partner or stockholder who withdraws from the business either
voluntarily or involuntarily. The agreement may contain a designated price or a formula
to use to determine the price. If so, the price or the formula needs to be updated
periodically. Payment terms and conditions of sale are also generally provided. Clients and
their attorneys frequently rely on our Valuation to assist them in drafting the proper wording
to insure that valuations are performed in accordance with the clients' wishes.

Our Valuation can assist in making sure that the portion of the agreement regarding
valuation is worded clearly so that the valuation process is without ambiguity. This will
often involve establishing at least the following:

  • The appropriate standard of value to determine value in accordance with the wishes of the parties to the agreement
  • The procedures to be employed to ascertain the value; e.g. a fixed formula or the process to obtain an actual valuation
  • The appropriate valuation methods to be used by the valuation analyst, along with the premiums or discounts to be applied in the process