Pros and Cons of Using Formula Clauses in Buy-Sell Agreements
A formula clause explains how a business will be valued, usually as part of a buy-sell agreement, employment agreement, transfer of interests under certain circumstances, or other agreement entered between owners of a company. In this post, we explain formula clauses, when they are used, why they are used, and why we ultimately recommend they not be used.
Observations from Recent Litigation Engagements
A common topic from several recent auto dealer litigation cases is personal goodwill. Not only is its presence hotly debated, but practitioners further attempt to discern just how much of a business’ value is directly related to personal goodwill. There’s no textbook that discusses where it exists and where it doesn’t, and it’s more prevalent in certain types of businesses or industries than others. Before any attempts to measure and quantify it, I think the most important question to ask is “does it exist?” Often with ambiguous concepts like personal goodwill, the adage “you know it when you see it” is most appropriate.
Litigation engagements are generally very complex, consisting of many moving parts. The analogy that comes to mind is the nostalgic game of Tetris. Like the game, many clients involved in auto dealer valuation disputes also experience anxiety and stress as problems begin to pile up.
We hope you never find yourself a party to a legal dispute; however, in this post, we offer words of wisdom based upon our experience working in these valuation-related disputes. We begin with seven topics, posed as questions, that have been points of contention or common issues that have arisen in recent litigation engagements. We’ve also added two questions to consider additional issues raised during the COVID-19 crisis.