A buy-sell agreement can be a very critical instrument in preventing potential conflicts and litigation between shareholders or partners in closely held businesses with respect to the anticipated disposition of their interests. The objectives of these agreements include:
- Offer a definitive and fair mechanism for a departing owner to obtain liquidity, as well as a means for determining a fair price for his or her interest.
- Define events such as death, physical disability, divorce, retirement or employment termination that will trigger the agreement.
- Stipulate a funding mechanism for the purchase of an equity interest upon the occurrence of a triggering event.
- Provide for restrictive covenants such as rights of first refusal which can deter the sale of equity interests to unacceptable third parties.
PDR Valuation can be an important contributor to a workable buy-sell agreement, including:
- Provide a coordinated review of an existing or new agreement from a business valuation perspective. This may include input on key factors impacting an appraisal such as standard of value (i.e., fair market value or an alternative standard) and level of value (i.e., does the agreement require an appraisal at the enterprise level or on a noncontrolling interest basis).
- Provide an initial appraisal and periodic reappraisals. Periodic reappraisals are beneficial to the parties since they ensure that changes in industry, company-specific and other relevant factors are reflected on a current basis and assist with their ongoing financial planning.
- Provide a reappraisal at the time of a trigger event.