Most Shareholder Agreements or Buy-Sell Agreements are Poorly Designed

• Often rely upon old Value
• Unclear Definition of Value Standard
• No Definition of Whether Discounts Apply
• Vague Process for Getting Values and Resolving a Final Value
• Lack of Clear Process Can Lead to Adversarial Situation Occurring Outside of Legal System

Buy-Sell Agreement Valuations

• Methods
  • Agreed upon Price
  • Formula tied to Revenue or Earnings
  • Valuation Process at Time of Dispute/Departure
• Standard of Value
  • Fair Market Value
  • Fair Value
  • Other
  • Will Depend upon State of Incorporation if Not Clearly Defined in Agreement

Key Elements to Agreements

• Determination of As of Date for Valuation
• Source of Financials to be used
• Rules on Sharing Information with Appraisers
• What Valuation Adjustments Allowable
• Process Timeframe
• Standard of Value
• Explicit Statement about Discounts
• Qualifications of Appraiser
• Who Bears the Cost?

Valuation Best Practices

• Agreement Should Require Current Value Determination
• Size of Firm Should Determine Whether to Specify Single or Multiple Appraisal Approach
• Multiple Appraiser Approach:
  • Specify the Process and Value Resolution Carefully
  • Require Information Shared with Both Parties
  • Require Management Interviews Done Jointly
    • Spell out Value Standard ? Do not Leave to State
• Law or Judicial Findings
  • Specify Timeframe for Payment and Funding Source

Source: Roger, our valuation expert of choice