Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.
Issues, what valuation issues?
Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners, or an ownership dispute.
The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably to avoid valuation issues.
Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement because the value of the interest is likely to change as the business grows and market conditions evolve.
What are our protocols?
At a minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:
- How “value” will be defined,
- Who will value the business,
- Whether valuation discounts will apply,
- Who will pay appraisal fees, and
- What the timeline will be for the valuation process.
It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.
Are we ready?
Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout or valuation issues when they arise. Our firm would be happy to help.
Abacus CPAs is ready to help you confront and reduce the liklihood of any future valuation issues. Contact us to speak with a proactive CPA today!