The fields of law, accounting and valuation are continuing to become more complex. Given the overlap in these areas of specialty, it is increasingly important for attorneys to have an understanding of the accounting, tax and valuation effects of the legal agreements they draft. Armed with this knowledge, lawyers can produce the intended outcome for their clients and minimize unintentional consequences and compliance burdens.
It is a best practice for closely held businesses with multiple owners to have a buy-sell agreement in place to govern the purchase and sale of ownership interests. When an ownership transaction is not imminent, the valuation provisions included in buy-sell agreements are oftentimes not heavily scrutinized. However, when the time comes for an ownership transaction to occur and the buy-sell must be followed, VALUATION often becomes the most significant issue. Therefore, it is important to begin with the end (a potential shareholder transaction) in mind when drafting buy-sell agreements—particularly the valuation provisions.
Triggering Events in Buy-Sell Agreements
It is important that a buy-sell agreement explicitly addresses the triggering events that will require adherence to the provisions of the agreement. There are a number of factors that can trigger a transaction (and potentially, a valuation) under a buy-sell agreement:
- Owner Discretion
Unless the business is sold before any of the above events occur, the valuation provision of a company’s buy-sell agreement will govern the economics, structure and terms of the transaction.
To learn more about how a business is valued or to gain insight on the financial and economic issues that affect today’s business world, call the experts in the Valuation and Litigation Support group at 440-449-6800. Please email Sean Saari if you would like to learn more about buy-sell valuation considerations.
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