Buy-Sell Agreements Insights
“Closing of the Books” to Allocate Income on S-Corp Ownership Change
May 30, 2019 / in Business Valuation, Buy-Sell Agreements / by Al Statz
As brokers and appraisers of closely-held and family-owned businesses, we work with a lot of S-Corporations. When S-Corp shares transfer subject to a buy-sell agreement, the valuation date, trigger date and transaction date rarely fall conveniently at the end of a year. That’s no problem for valuation experts. We can determine value as of any date. But what’s the fairest way to allocate taxable income among S-Corporation shareholders in a year in which ownership changes? …
One Business Appraiser that All Parties Know and Trust
November 10, 2018 / in Business Valuation, Buy-Sell Agreements / by Al Statz
Jointly retaining a single trusted business valuation expert in disputes over value is becoming increasingly common as owners seek ways to streamline the valuation process, protect their companies and control costs. Naming one appraiser in buy-sell agreements is also becoming more popular. In this slightly long-winded rant, I will discuss the pros and cons of using one appraiser that all parties know and trust, and explain why you should give serious consideration to this option. Where …
Four Questions Your Buy-Sell Agreement Should Answer
January 8, 2018 / in Buy-Sell Agreements, Exit Planning / by Al Statz
A buy-sell agreement is a common contract between shareholders that both restricts ownership and facilitates the transfer of shares in a closely-held company. The other shareholders or the company become the buyers (marketplace) for what would otherwise be highly illiquid stock. Every buy-sell agreement should answer four fundamental questions: 1. Who is the purchaser? Generally, buy-sell agreements take one of three approaches to determining who the purchaser will be: Redemption, Cross-Purchase or Hybrid. In a …
Does My Buy-Sell Agreement Establish Value for Estate Purposes?
December 20, 2017 / in Business Valuation, Buy-Sell Agreements, Exit Planning / by Al Statz
Buy-sell agreements that contain a clause that values stock at less than fair market value can be disregarded for tax purposes. It is important to consider the requirements of Internal Revenue Code (IRC) Section 2703 when developing an estate plan involving business interests in which 50% or more of the stock is family owned. Section 2703(a) states that a shareholder agreement (entered into after October 8, 1990) that allows for the acquisition or transfer of …
Hidden Problems with the Price Formula in Your Buy-Sell Agreement, and Solutions
May 12, 2017 / in Business Valuation, Buy-Sell Agreements, Exit Planning / by Al Statz
It is tempting to select a formula approach to pricing shares when business partners come and go. After all, a formula is easy for everyone to understand, and in theory at least, inexpensive to apply. If you’re satisfied with getting to a price, any price, then congratulations – job done. But the goal is to arrive at a price that is fair to all concerned. This article discusses some of the unforeseen problems with buy-sell …
Twenty Reasons to Know the Value of Your Company
February 22, 2017 / in Business Valuation, Buy-Sell Agreements, Exit Planning / by Al Statz
Company owners and shareholders seek independent business valuations at various times for various reasons. Here are twenty situations in which you may want a business valuation: An owner has passed away and a valuation is required to settle the estate per IRS regulations. An owner is getting divorced and needs to have the company or their fractional interest valued to settle the marital estate. An owner wants to gift shares to his or her heirs. Business acquisition financing. Owners …
Buried in the Corporate Archives – a Valuation Case Study
August 23, 2016 / in Business Strategy, Business Valuation, Buy-Sell Agreements / by Exit Strategies
A lot of our valuation work is done for the purpose of internal share transfers of private businesses, or buy-sell transactions. In doing this work, we often see that owners have overlooked or neglected to keep important documents up to date. One such document is the buy-sell agreement, which articulates important legal, tax, valuation and financing issues that are important to ensuring smooth share transfers and business continuity. We recently evaluated a holding company with a fair …
Pricing Methodologies in Buy-Sell Agreements
April 29, 2015 / in Business Strategy, Business Valuation, Buy-Sell Agreements / by Jim Leonhard
When it comes to valuing a business for tax filings, M&A transactions, ESOP’s and most other purposes, business appraisers are usually free to use all of the methodologies in their arsenal. But, when it comes to Buy-Sell Agreements that govern the sale or exchange of interests among closely-held business owners, many of these agreements specify a fixed amount or formula to price equity interests. Recently our firm analyzed the valuation and funding-related provisions used in thirteen buy-sell …
Funding Your Buy-Sell Transactions
April 22, 2015 / in Business Strategy, Buy-Sell Agreements / by Al Statz
A properly structured Buy-Sell Agreement (BSA) ensures a market for owners’ equity when they leave the business, restricts the transfer of shares to unwanted parties, and lays out a set of rules and processes that mitigate the overall risk of uncertainty when a trigger event occurs. However, without having adequate funding mechanism(s) in place, a well-intentioned buy-sell agreement may not satisfy the shareholders needs when a trigger occurs. In this post I’ll briefly outline the …
How a Covenant not to Compete Affects Value in Buy-Sell Agreements
April 1, 2015 / in Business Strategy, Business Valuation, Buy-Sell Agreements / by Al Statz
When someone sells a privately-held company, the buyer usually insists that the seller sign a covenant not to compete. In fact, in over 20 years of business sales and acquisitions, I have yet to see a purchase agreement without a covenant-not-to-compete (CNTC) provision. Now let’s say that your Company or its shareholders purchase all of a departing 50% shareholder’s interest for fair market value; is it reasonable to expect that the selling shareholder would not …
