The “Words on the Pages” of Every Buy-Sell Agreement Matter

When we talk about valuation processes in buy-sell agreements, I often use the term “words on the page” or pages. Let me quote myself from Buy-Sell Agreements for Closely Held and Family Business Owners, briefly. “I often use the term ‘words on the page.’ Appraisers retained pursuant to the operation of buy-sell agreements are normally bound to prepare their valuations in accordance with the kind of value described or defined within the agreements. In other words the quote ‘words on the page’ will determine the kind of value to be developed in the appraisal. Collectively, these criteria become the assignment definition.”

I’m often asked about reading the words on the page. Business appraisers must do this (read the words) from business and valuation perspectives. I’m not a lawyer. It’s been suggested to me that it’s a contract, and appraisers are being asked to interpret contracts. But when the trigger event occurs, as with a buy-sell agreement, the appraiser is who, in almost all circumstances, must interpret the words on the page — always from business and valuation perspectives. So what do I mean by the words on the page? Well in the typical buy-sell agreement, there’s a little block of text 150 to 200 words and these are the words on the page that describe the valuation process for that particular buy-sell agreement. Here’s one right here. You can see that’s all of the words on the page. That’s less than 200 words that define a valuation process I was involved in recently.

So anyway, what has to happen to have a good valuation process? Well, those words on the page need to determine several things. We have, in terms of defining elements of a buy-sell agreement, we have to have the standard of value. That might be fair market value. That might be something else. But, in most cases for buy-sell agreements, fair market value is the level of value. What do we mean by the level of value? On the levels of value chart, it could be the pro rata share of the value of the enterprise. It could be the value of the interest. It could be the value of the enterprise as adjusted pursuant to the agreement. But you have to read the words on the page to know.

It’s very seldom a strategic value.  Although, if the words on the page are unclear, what you’ll find — and I’ve seen it in several buy-sell agreement disputes — one appraiser determines value at this strategic value, and the second appraiser at the non-marketable minority value. That is not a good valuation process. In any event, we have to determine the level of value. It should be a going concern value, unless of course, it’s in liquidation, but it needs to state going concern value because going concern value may preclude the strategic value concept. That involves a merger and is not quite a going concern. We have to specify the “as of” date. Now that sounds like it might be fairly straightforward, but it’s not as easy as you might think. Think about appraiser qualifications. What do I mean by appraiser qualifications? What’s the education? What are the valuation credentials? What about valuation education? What about appraisal experience? What about industry experience? And, what about publishing, speaking or anything else that you might want to know about the particular appraiser that you are selecting. The term “independent appraiser” won’t quite cut it. But I see that term in a lot of valuation buy-sell agreements. The appraisal standards need to be followed. Well, certainly you want your appraisers to follow the Uniform Standards of Professional Appraisal Practice. If they are credentialed by the American Society of Appraisers, they have to follow the ASA Business Valuation Standards. If they’re certified by the AICPA — the SSVS-1 Statement on Valuation Standards. If they’re with the NACVA, it’s their Professional Standards. Or, if with RICS, there is the Red Book. But, at very least, your agreement should state they will follow the Uniform Standards of Professional Appraisal Practice, and any other standards-based upon their credentialing.

You won’t find that though in 150 or 200 words. So now we have the funding mechanism. What do I mean by the funding mechanism? Well, life insurance is often a funding mechanism. We sometimes use leverage. We sometimes use cash on hand. But if you have life insurance on your buy-sell agreement, it either it’s a corporate asset where it’s added to value or it’s a funding vehicle where it never reaches the balance sheet of the company who buys the stock. And you get two significantly different results when you have that. Buy-sell agreements, valuation process buy-sell agreements are defined by the words on the pages in each agreement.

Now, I want to put a little pressure on myself. I have been working on the fourth book on buy-sell agreements, and this one will be geared toward attorneys, and it will be geared toward appraisers who work with attorneys who are interested in the words on the page that will define workable valuation processes. If you let me know that you’re interested in the book, you’ll put a little pressure on me to finish it because — here it is. It’s almost finished. I’ve really got to get it done. You can help me if you’ll just give me a little feedback and say, “We want to get that book out here quickly!”

I read the words on the page in buy-sell agreements when I’m involved in disputes, or when I’m involved with client companies. You should read the words on the page in your clients’ buy-sell agreements. If you’re a business owner, you should certainly read the words on the page in your own agreement.

This is Chris Mercer. I’m at the worldwide headquarters of Mercer Capital in Memphis, Tennessee. You can contact me at That’s my blog — or You can find me if you’d like to talk. I look forward to talking with you, and to the next Valuation Video. Good Day!

Please note: I reserve the right to delete comments that are offensive or off-topic.

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