None of these values apply particularly to buy-sell agreements, even though they may be technically. Instead, valuation experts like our group view the value of a given business or the stake in a business according to value standards such as fair market value or fair value. In our world, the most common level of value is fair market value, which applies to virtually all federal and estate tax valuation matters, including gifts of public utility, inheritance tax, value tax, and other tax matters. It is also often used in bankruptcy cases. At Mercer Capital, we`ve read hundreds, if not thousands, of buy and sell agreements. Although we are not lawyers and we do not try to design such agreements, our experience has allowed us to draw some conclusions about what works well and what does not work. By “working well” we mean a permanent agreement that effectively manages transactions and transfers of ownership in different circumstances. Agreements that don`t work well are the subject of great controversy, resulting in costly distraction. The world of vintage cars is full of stories of “barn finds,” precious cars that have been forgotten, found and restored in the camp for decades and sold for currency. One of the most famous features above, a Ferrari 250 GT SWB California Spyder, which once belonged to a French actor and was found in a barn on a French farm in 2014. The car was one of 36 Ferraris ever made and one of the most valuable of all time. After being exhumed, the Ferrari was lightly cleaned and, roughly, sold as found for $23 million at an auction.
As hard as it`s to imagine such a precious car being forgotten, we more often see forgotten buy-sell agreements that collect dust in desk drawers. Unfortunately, these contracts often become liabilities instead of assets once they are exhumed, as the words on the page often force signers to make long-forgotten commitments. That`s why we encourage our customers to regularly review their buying and selling agreements and have compiled some of our observations on this in the white paper below. You can also download it as a PDF at the end of this page. We hope this helps; Call us if you have any questions. If a shareholders` agreement calls the standard “fair value,” does that mean legal fair value, GAAP fair value, or does it actually mean fair value? It`s worth being clear. Does the prize mechanism create winners and losers? Should the value be traded on the basis of a business valuation that takes into account specific buyer-seller synergies, or not? Should the pricing mechanism be based on a value that takes into account valuation reductions due to lack of control or market opacity? Outgoing shareholders want to be paid more and shareholders obviously want to continue paying less. What is not obvious at the time of establishing a purchase-sale contract is who will withdraw and who will continue.
If you do not intend to have annual assessments established, have your business evaluated. Doing so, if nothing is at stake, will make a big difference if you find yourself in a situation where everything is at stake. Most disputes regarding shareholder agreements in which we participate begin with significantly different expectations with respect to valuation management.. . . .