While many buy-sell agreements call for the issuance of promissory notes for at least partial funding of purchases, there is no corollary consideration of the fair market values of the promissory notes to be issued. A previous post discussed promissory notes in terms of rates and terms. This post examines the concept of the fair market value of promissory notes issued in connection with buy-sell agreements.
The Wall Street Journal recently featured an article about the AICPA’s move to open up its ABV credential to non-CPAs. This article caused me to think about the significance of the AICPA’s new position for business valuation.
Promissory notes are used as funding mechanisms in many buy-sell agreements. Yet the potential notes to be issued when trigger events occur are often given little thought by drafting attorneys or parties to buy-sell agreements. They should because the terms of these promissory notes matter both to issuing companies and to receiving shareholders who sell their shares.
Do business owners “know” the values of their businesses? And do they need help if and when they think about selling, either unexpectedly or as part of a plan? I answer these questions in this week’s post.
Many buy-sell agreements will fail to deliver the fair market value of interests sold following trigger events, even if the valuation of the interests are exactly on point. I’ve written briefly about this topic before, but provide elaboration here.
Shannon Pratt is a living legend in the business valuation community. On Thursday, April 12th, he will celebrate his 85th birthday. This is your opportunity to send him a birthday card!
In this post’s video, I briefly address the definition of disability in a real buy-sell agreement, explain why it will not work if there is a trigger event, and offer an objective suggestion to avoid problems with the definition.
Yesterday, Peter sent me a copy of a New York Court of Appeals case, Congel v. Malfitano. In New York, the Court of Appeals is the appellate court, while trials occur in the lower level Supreme Court. Is this another “bad behavior” case like Wisniewski v Walsh? Let’s see.
One of the biggest and recurring problem with buy-sell agreements is their frequent failure to specify the role of life insurance proceeds. In the accompanying video, I provide a suggestion to solve the future valuation question.
The Tax Cut and Jobs Act of 2017 lowered the marginal corporate federal tax rate to 21%, and all of a sudden, things just aren’t the same anymore. At first blush, the impact of the recent tax cut is straightforward. Lower taxes mean higher after-tax cash flows, which should translate into higher values for businesses. But how much higher? Value is a function of expected cash flows, expected risk, and expected growth. While expected cash flow (after-tax) will be rising following the corporate tax cut, what happens to expected risk and expected growth?