Whenever business partners agree to a buy-sell agreement, they should have a clear, defined process in the agreement on how the business will be valued for any future buyout. Sometimes it refers to a formulaic approach such as 1.5x times book value, 4x times last year’s earnings, a multiple of revenue for example. These approaches do not necessarily need a valuation professional.
Independent Valuation of the Company
Other times, the agreement calls for an independent valuation of the Company from one or multiple appraisers. Multiple appraisers generally arise when the both buyer and seller have their own appraiser, and if they do not agree, then they both hire a third appraiser to settle on a value. We have seen this approach not only have excessive costs, time delays, but most important, create division between business partners or families.
Avoid Pitfalls of Buy-Sell Agreements
In our experience, most buy-sell agreements are not well-defined, do not have a proper funding mechanism, and do not detail critical assumptions that an appraiser needs to know before starting the engagement, such as;
- standard of value,
- level of value,
- the “as of” date,
- appraiser qualifications and appraisal standards,
- and other items such as will discounts apply for a minority interest.
Buy-Sell Agreement Valuation for Your Business
Please contact us to perform the valuation if a triggering event has occurred that you need a valuation. Also, if a triggering event has not occurred, we would like to help review your current agreement and make suggestions to improve so you can avoid some of the pitfalls we have seen through the years.