Many buy-sell agreements with valuation processes provide guidance suggesting that appraisers should apply no discounts because of the minority nature of any holding and that there should be no discount for the lack of marketability of shares.
My recommendation is that if your business is housed in a tax pass-through entity, your buy-sell agreement should state that it is to be valued as if it were a C corporation. Here is why ….
As baby boomers age, more and more private businesses will transition to new ownership. We are, to repeat, in the midst of a demographic tsunami. Careful consideration of the “Seven Questions of Highly Effective Business Transitions” can assist business owners, their advisers and all their other stakeholders in creating and implementing successful transitions.
My advice as to the appropriate consideration of embedded capital gains for tax pass-through entities is that appraisers should not tax affect the gains in valuations for buy-sell agreements. You should discuss this issue with your tax advisor and let him or her walk you through examples of what happens to buyers or sellers under varying assumptions about embedded gains.
Booth Computers, a New Jersey family partnership (“Booth”), was created in 1976. In 1978, a related partnership, HCMJ Realty Ltd. was formed, of which Booth was a limited partner. Interests in Booth were given to James, Michael and Claudia Cohen by their father, Robert. The partnership acquired substantial assets over a period of more than […]
The article referenced is good advice. Don’t wait another day to review your buy-sell agreement.
In the June 2011 issue of The CPA Journal magazine is the article “Buy-Sell Agreements: Business Owners Benefit from Planning Ahead” by yours truly. This is a comprehensive article and one I hope you will read.
Rights of first refusal (ROFRs) are not the same as buy-sell agreements. They may seem to operate like a buy-sell agreement, in that they provide procedures related to possible future stock transactions. But ROFRs do not assure that transactions will occur.
My challenge to readers is to eliminate obvious problems with your buy-sell agreement that can be easily avoided with regard to selection of an appraiser.
There are fewer than 150 words in the Purchase Price Section quoted above. I have written about 2,400 words talking about the nuances in the paragraph. If I can do this while only thinking about it, consider what the parties might do following a trigger event, particularly if the financial stakes are high.
