The Level of Value: Why Estate Planners Need to Understand This Critical Valuation Element of a Buy Sell Agreement

Business appraisers retained pursuant to the operation of buy-sell agreements are normally bound to prepare their valuations in accordance with the kind of value described or defined within the agreements. Confusion over an appraiser’s basis of value, either by appraisers or by users of appraisal reports, can lead to the placing of inappropriately high or low values for a buy-sell agreement transaction. Therefore, it is essential that business appraisers and the parties using appraisals are aware of the correct basis (level) of value.

$11 Million or $178 Thousand? New Jersey Appellate Court Upholds Book Value in Buy-Sell Agreement

Booth Computers, a New Jersey family partnership was created in 1976, and in 1978, a related partnership, HCMJ Realty Ltd. was formed, of which Booth was a limited partner. Interests in Booth were given to James, Michael and Claudia Cohen by their father, Robert. A 2011 case tells the story of how the Cohen children obtained their interests, and how Booth and at least one related partnership of which Booth was a limited partner, acquired substantial assets.

Out of the File Cabinet: The Ideal Time to Review Your Buy-Sell Agreement

Most business owners do not have a current understanding of the details and potential pitfalls that lurk within their own buy-sell agreements. Most view these agreements as obligatory legal documents that can be forgotten about until needed. Unfortunately, when a buy-sell agreement is needed it is too late to fix any problems within the agreement.

The Six Defining Valuation Elements of a Process Buy-Sell Agreement

Process buy-sell agreements are buy-sell agreements involving the use of one or more business appraisers in processes specified for determining value. Mercer Capital professionals have been involved in many valuation processes for determining price (valuations) for buy-sell agreements.

Buy-Sell Agreements: Two and a Tie-Breaker

Many buy-sell agreement templates call for an appraisal process to resolve the price (i.e., the valuation) for transactions under companies’ agreements upon the occurrence of specified trigger events. We call such agreements process agreements. Quite often, the descriptions of the valuation processes are quite short.

Often Overlooked Yet Important Items in Process Buy-Sell Agreements

Several other issues related to valuation should appropriately be addressed in your buy-sell agreements. The following discussion is by no means exhaustive, but includes items that are helpful in minimizing problems or uncertainties with the operation of process buy-sell agreements.

Life Insurance Proceeds in Valuation for Buy-Sell Agreements

Many buy-sell agreements are funded, in whole or in part, by life insurance on the lives of individual shareholders, who may be key managers, as well. Life insurance is a tidy solution for funding when it is available and affordable. It is important, however, to think through the implications of life insurance from a valuation perspective whether you are a valuation expert, a business owner or both.