Q:  Isn’t a valuation process agreement just a fixed price buy-sell agreement that is updated every year?

Answer:

The question is a good one.  And the answer is “no” and “yes.”

“No.”  A buy-sell valuation process agreement specifies just that – a valuation process to determine value.  The price is determined by appraisal. It is the appraisal process that establishes value on a regular basis or at trigger events, and not agreement of the parties in the context of setting price. So a valuation process agreement is not just a fixed-price agreement that is updated each year.

“Yes.”  A valuation process agreement does set a price which, for a time, is fixed.  In that context, it is a “fixed-price” agreement.  However, unlike with an actual fixed-price agreement, which calls upon the parties to reset the price each year (and they seldom, if ever, do), the valuation process agreement specifies a process for “fixing” the price that is, once underway, outside the hands of any party.

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For more information on this topic and other topics related to buy-sell agreements, check out Buy-Sell Agreements for Closely Held and Family Business Owners.

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This series, “Ask Chris Mercer,” is derived from the Q&A session of the May 16, 2012 webinar, “Buy-Sell Agreements” sponsored by WealthCounsel and attended by over 600.  

If you have a question for Chris, feel free to email him directly here.