Deja vu is a feeling of already having experienced a present situation. In my initial review of “Valuing a Business, Sixth Edition” (VAB6) by Shannon Pratt/American Society of Appraisers I was reminded that I had reviewed a significant number of the studies summarized in its Chapter 19 back in 1997, when my book, Quantifying Marketability Discounts, was published. In this and a few future posts, I’ll share what I believe is the most complete analysis of the historical restricted stock studies that are still relied upon by many business appraisers.
In a post last week, I wrote about appraisal review, indicating that this important topic would be a new focus for ChrisMercer.net. In that post, I addressed appraisal review, not as something mechanical that appraisers do, but much more broadly. With this post, we begin to look at the standard of value of fair market value through the lens of appraisal review.
Beyond a shadow of a doubt, if you own stock in a closely held or family business today, there will come a time in the future when you do not own or control it. This Valuation Video examines the Business Ownership Transfer Matrix that dictates that you will sell or transfer your shares, either partially or totally, and either voluntarily or involuntary. If you don’t plan ahead, the Law of Unintended Consequences may come into play. When you transfer stock involuntarily, you lose control over what happens, and things can happen that you didn’t intend. Promises may not be kept, estate taxes may be maximized, control may shift unexpectedly, and on. So plan ahead!
WARNING. Portions of the great majority of buy-sell agreements (or relevant portions of operating agreements) addressing the valuation of interests when trigger events occur are seriously flawed. As a result, they are destined to create time-consuming, expensive, and emotional disputes between buyers and sellers when they are triggered. Most attorneys and business owners do not seem to believe me, but recent experience only reinforces the need for this warning post.
I’ve said many times that, if you are so foolish as to have a fixed price buy-sell agreement, it is necessary to reset the price on a regular basis. What I should have said is that if the price on a fixed-price buy-sell agreement is reset regularly, it is absolutely necessary that it be a price that is appropriate for all shareholders, whether they are future buyers or sellers under their agreements.
Today I’m sharing the video, Corporate Finance Basics for Directors and Shareholders, as well as the transcript from the video. In the presentation, Travis W. Harms, CFA, CPA/ABV, senior vice president of Mercer Capital, offers a short, yet thorough, overview of corporate finance fundamentals for closely held and family business directors and shareholders.