Tag Archives: how is a business valued

Buy-Sell Agreements: Are You Prepared?

Business scenario: Fifteen years ago, I and three others started a business. We had our corporate attorney draft a buy-sell agreement which we all signed.Fast forward to current day. A triggering event occurs (a member quits, is voted out due to lack of performance, retires, becomes disabled, is going through bankruptcy, is having a divorce, etc.), what happens? Our buy-sell agreement was never updated, so what happens is dependent upon what the agreement stated 15 years ago.

In this specific case, there are a number of variables that can drastically affect the outcome of the situation at hand. If there is a shareholder dispute, the process will be fairly lengthy as a result of involving multiple attorneys and the appeals process. Who owns the stock during this timeframe? Does the former shareholder, who feels was voted out of the business unfairly, still get distributions during the lengthy appeals process?

Or, what if a member is going through a divorce, the ex-spouse wants part of the other spouse’s percentage of ownership in the business. Does the buy-sell agreement limit this from happening?

If life insurance policies are in place on each of the owners in case a triggering event occurs. Will the proceeds from the policies be enough to purchase the interest of the departing owner? Does the policy amount cover the total value of the departing member’s interest? If not, what other funding vehicle is going to be to purchase the interest? Also, is the value received by the departing member or member’s spouse “in the ballpark” of what was expected; or is there going to be some ill feelings when it is all said and done between friends (now former friends), family, etc.?

buy-sellagreementSo, let me ask you this, do you have a buy-sell agreement in place? When was it last updated? Does the buy-sell agreement address any of the items mentioned in above? Are the intentions of the ownership group the same as they were when the last buy-sell agreement was signed? Does the buy-sell agreement actually meet the expectations of those signing it?

These are critical questions that must be considered when involved in a buy-sell agreement.  Whatever you spend on a buy-sell, it will be a drop in the bucket compared to what it can save you.

A buy-sell agreement provides the peace of mind knowing that their business. It also:

  • Provides money to create a fair market value exchange
  • Promotes equitable and orderly transfer of wealth, ownership and management
  • May offer tax advantages
  • Guarantees heirs a buyer for assets they may not know how to manage
  • Provides heirs cash to pay estate debt, expenses and taxes

It is far much easier to take the time now to ensure all your “ducks are in a row” while the interests of the parties involved are in alignment. Once a triggering event does occur, the interest of the parties involved generally diverge, and either the buyer or the seller will ultimately be unhappy and unsatisfied. Which end of the spectrum will you be on? Contact our buy-sell agreement specialists today at leininger@wvco.com or call (419) 891-1040 and ask for Ryan Leininger.

By: Ryan Leininger, CPA, CVA

Need to Find Out What a Business is Worth?

10A closely held company is often the single most valuable asset the owner possesses. That’s why it is extremely important to know exactly how much a business is worth. However, determining the value can be an arduous and time-consuming task. Click “Full Article” to find out some of the reasons why business owners need to obtain valuations to protect their investments.

A business valuation is used to establish a value for an interest in a closely held business or professional practice. It takes into account both quantitative and qualitative tangible and intangible factors associated with the specific business.

There are many reasons why a business owner might need a valuation of a whole or partial interest, including:

A Buy-Sell Agreement

All closely held businesses should adopt a buy-sell agreement among the partners or shareholders to avoid potential future litigation. Without an agreement, an existing shareholder can be placed in the awkward position of negotiating with a surviving spouse or having a surviving family member suddenly become a shareholder of the business.

The following language generally appears in buy-sell agreements: “…The buyer will buy the seller’s interest in the company stock at a price to be determined by an independent third party.”

Important: Businesses sometimes draft buy-sell agreements to determine purchase prices but these agreements may not be finalized or may need to be updated.

The Purchase or Sale of a Business

Most owners believe that they are the best candidates to value their own businesses, but an independent analysis is critical. The business valuation report should illustrate that the valuation expert does not have a vested interest and therefore the value is not overstated or understated.

When buying or selling a business, the valuation may be used as a starting point for negotiations and may even provide an estimate that a seller might expect to receive. The valuation can also establish a range of business values that can assist a seller in negotiating the sale.

Estate Planning and Gifts

Establishing a value for a company may help a business owner anticipate future estate tax obligations and plan accordingly. For example, as part of an estate plan, a business owner may give away interests in a closely held company to younger relatives. A business valuation sets the value of those gifts, for tax purposes.

Discounts may be available due to a lack of marketability of shares in a closely held company and a lack of control that minority shareholders have in the business.

When taking valuation discounts, you want to avoid future tax litigation, which can be costly. These gifts may be scrutinized by the IRS. Therefore, it is important to adhere to established tax valuation principles. To protect your valuations, it’s a good idea to obtain updates on an annual basis.

Divorce

If the owner of a closely held company gets a divorce, the valuation helps determine the division of assets. There are many unique issues involved in divorce valuations, as compared with those done for other reasons. The process can be adversarial in nature and the valuation must adhere to case and statutory law on a state-by-state basis.

Employee Stock Ownership Plans

Commonly referred to as “ESOPs,” these are trusts established by corporations to allocate some of their stock to employees. They are intended as a benefit to motivate employees and often provide tax benefits to the businesses. A valuation is necessary to determine the selling price of the stock from the corporation to the ESOP.

Other Purposes

There are several other reasons why business valuation services may be necessary, including mergers and acquisitions or litigation support.

For example, in a merger situation, the valuation expert may be asked to establish an “exchange value” of the companies involved. In a pending lawsuit, an attorney might need to determine the value of a closely held business. The valuation professional is asked to give expert testimony regarding the conclusions. The need for litigation support can also arise in partner disputes, business reorganizations, capital infusions, dissenting shareholder actions and insurance claims