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04 Nov

Buy-Sell Agreements: The Appraiser, Standards and Defining Value

Posted in Buy-Sell Agreements on 04.11.10

In my last post, I talked about the types of buy-sell mechanisms in agreements. In this post I want to focus on how to identify the appraiser and how to define value in a buy-sell agreement. For more information on buy-sell agreements, you can purchase Buy-Sell Agreements for Closely Held and Family Business Owners.

The Appraiser
Not all appraisers are the same, and not all CPAs are appraisers. It is a good idea to specify in your buy-sell agreement that an appraiser with a certification from a recognized appraisal organization will be selected. The generally recognized designations are ABV (American Institute of CPAs), ASA (American Society of Appraisers), CVA/AVA (National Association of Certified Valuation Analysts) and CBA (Institute of Business Appraisers). You can also clearly identify the selection process. Remember that the more appraisers that are involved, the higher the cost and the longer the process will take.

The danger of specifying that the company’s accountant will determine the value of the company is that the company’s accountant may have no valuation experience. You would not go to your internist for heart surgery. Why would you go a general accounting practitioner without valuation training for valuation services? Credentialed appraisers have had training in valuation and usually have met some sort of experience requirement.

Applicable Standards
Each of the appraisal organizations has a code of ethics and professional standards. You can specify that the appraiser will perform the valuation in compliance with those standards. (Generally accepted accounting standards (GAAP) have nothing to do with valuation.)

Defining Value
Stock transferred for gift or estate purposes is valued for the tax reporting at fair market value: What a willing buyer would pay a willing seller, neither under compulsion to act, and both being informed of relevant facts. The fair market value of a minority (non-controlling) interest will usually have discounts for lack of control and lack of marketability, making it equal to less than a pro rata portion of the total company value.

Since the buy-sell agreement is your agreement, you can have the provision state whatever you choose. If you want the value to be a pro rata portion of the total company value, you just have to define value that way. (For shareholder disputes, depending upon the state, discounts for small companies are ignored.) Another option is to specify that discounts will not exceed a certain percent of value. The point is you can define value any way you want. You should understand the consequences of the definition that you use.

If you need assistance in understanding how the value stated in a buy-sell agreement will impact your company, please contact me.

©2010 Florida Business Valuation Group


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