DeMatteo Salvage Co. and the DeMatteo families who owned it, were mired in litigation regarding their buy-sell agreement for nearly a decade. Whatever one thinks of the outcome, what’s absolutely clear is that the buy-sell agreement failed miserably ….
Whether because of concern for rocking the boat, perceived self-interest, or lack of understanding, many business advisers continue not to raise the issue of buy-sell agreements. And many, if not most, business owners simply do not give their agreements much, or any, thought.
If companies and their shareholders will pay attention to and exercise the Three Rs of Buy-Sell Agreements, most all of the future problems that will occur at trigger events absent this attention can be avoided. Certainty will be enhanced. Shareholder and corporate planning will be facilitated.
If you own a closely held or family business and have been hanging on because of a nagging sense of responsibility or fear of letting go – even if you know you need to – then get and read this book.
If you are a key person and you know you will always be a buyer in buy-sell agreement transactions, this concept of a key person discount might not bother you. But you may well be a seller one day. That’s no time for a big surprise in valuation.
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.
At less than 300 pages I tell colleagues Business Valuation: An Integrated Theory, 2nd Edition is to the valuation community what Harvey Penick’s Little Red Book was to the golfing community.
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.
