How Is a Valuation Useful when Drafting Buy-Sell Agreements?
Buy-sell agreements for privately-held companies provide the shareholders with a mechanism by which the interest of a deceased or withdrawing shareholder may be liquidated through a repurchase agreement, a cross-purchase agreement, or a hybrid agreement. Providing for how the value of the shares is established is critical for a successful buy-sell agreement. Generally, there are three methods through which the value of the shares may be established: 1) specific formula approach based on a financial metric such as book value, earnings, etc., 2) negotiation between the parties, 3) independent outside appraisals. While the value determined by a specific formula may be manipulated by the controlling shareholders who have some discretion over how the financial statements are reported and the negotiation between the parties may fail when the parties are unable to agree on terms, an independent outside valuation conducted as part of an annual valuation program provides a clear means of establ
