I have long used the term of “words on the pages” of buy-sell agreements to relate to those usually too few words that describe the valuation processes called for by the agreements. A typical agreement will devote 150-200 words to attempt to describe a multiple appraiser valuation process. It is not possible to do so. There are too many things that have to be described or defined. In this video, I talk about the defining elements of any buy-sell agreement valuation process and the need for clarity in the “words on the pages” to assure reasonable processes when agreements are triggered. I also state that I have a new book in the process of finishing that will provide draft “words on the pages” that have a good chance of working. Attorneys, business appraisers, and other advisers to business owners will want this book!
Kashmiry v. Ellis is a recent Ohio appellate case regarding the buy-sell agreement portion of a shareholders’ agreement. The case reinforces a number of things I have been “preaching” about for years. If a buy-sell agreement has provided for an annual valuation by agreement of the parties, then the parties must reach agreement annually. If the agreement then provides for a valuation mechanism to determine the price following a trigger event, then the valuation process should be clearly defined and workable.
I have read too many buy-sell agreements to count. The typical valuation process in them (for appraisals following trigger events) range from 150 words to perhaps 300-400 words. That simply is not enough “wordage” to describe or define any valuation process, much less an appraisal. I started focusing on the seven defining elements over the years as I experienced problems with each and every one of them in troubled or litigated valuation processes where I was either an appraiser or a consultant. Do your clients’ buy-sell agreements adequately define the seven elements? Or does your company’s agreement do the same? If they are not clear in an agreement, future trouble is almost certainly lurking.
The standard of value of fair market value is very familiar to attorneys and appraisers and often the subject of apparent disagreement. This post looks at the standard definition of fair market value and then breaks it down into its component parts as they relate to hypothetical willing buyers and sellers. Fair market value occurs at the intersection of negotiations between these two sets of hypothetical parties. First, we must understand the meaning of fair market value. Next, we must ask the follow-up question: the fair market value of what? We investigate the relationship of the definition of fair market value and the asset(s) to which the definition pertains.
I’ve said many times that no formula agreement can be written that will provide reasonable valuation calculations over time under all circumstances involving a company, its industry, the national economy, conditions in the financial markets, and more. This week, I review the case, Roth v. United States, 511 F. Supp. 653 (E.D. Mo. 1981) and the appeal to make this point.
If your company or your clients’ companies have formula pricing for their buy-sell agreements, the likelihood of future problems is high. It is just not possible to foresee all possible future circumstances when setting a formula today. The solution to these problems lies in a Single Appraiser, Select Now and Value Now valuation process.
Fixed price buy-sell agreement pricing mechanisms are not good and seldom work. The problems with these agreements can be “fixed” if the parties focus on the future and take steps today to solve future problems before they occur. In this post, I discuss two single appraiser processes to help solve these problems.
The idea for naming the appraiser at the time a buy-sell agreement is signed was not original to me. I first heard of the idea in the late 1980s when I learned that I had been named as the appraiser in a buy-sell agreement that had been signed a few years before. However, since learning of the idea, I’ve adopted it and promoted it widely in my books and articles on buy-sell agreements.
Today I discuss another buy-sell agreement story where shareholders bet on the company’s value upon a trigger event. This story’s protagonist “wins;” unfortunately, the same cannot be said for the other shareholders. While the price was updated annually, incongruent contexts led to a dichotomy in the price of what should have been paid and what was actually paid per the agreement.