- CBA – Certified Business Appraiser, Institute of Business Appraisers
- ASA – Accredited Senior Appraiser, American Society of Appraisers
- CVA – Certified Valuation Analyst, National Association of Certified Valuation Analysts
A Few Words on Buy-Sell Agreements
Jul 12, 2011
By Tracey Jeffers
Principal, Valuation Consulting
ZweigWhite
I recently worked on a valuation engagement for a project management firm involving minority shareholder value in a litigation. Besides the relevant financial data, one of the first documents I look at in these cases is the buy-sell agreement. What I discovered in my review for the litigation was a document containing a formula that used the average of the three previous years’ revenue multiplied by the percentage of shares owned by each shareholder. The result was the firm’s internal valuation of its shares. My first reaction?....wow, the language in this agreement presents multiple problems.
I have read a few buy-sell agreements in my day and they have ranged from the very good to the pretty bad. In the case of the agreement for the litigation, there were several major problems with the use of the formula including 1.) it set precedent for future company transactions at an overvalued rate, 2.) there was no delineation between control and minority owners and the respective value of their shares, 3.) minority shares are usually not worth pro-rata value of a control interest, and 4.) in general, firms in the architectural, engineering and environmental consulting industry do not bring 1x revenue on a price to sales multiple at a fair market value level.
From the valuation perspective, ideally a buy-sell should be clear and concise with regard to how the shares will be valued, who will value them and the process that will be undertaken. I believe there are five major issues that should be addressed in any buy-sell agreement:
What is the standard of value? Fair market value is the standard of value used in a majority of closely-held company valuations, unless there is an impending merger or acquisition then a different standard may be more appropriate. Fair market value is defined in IRS Revenue Ruling 59-60 as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both having reasonable knowledge of the relevant facts. It is helpful to the appraiser to have the standard of value identified to eliminate any question as to intent.
Who will value the shares? Many agreements that I have read, particularly those written several years ago, do not speak to who should value the shares. Others have been specific as to a professional with a valuation designation requirement. I am certainly biased in this regard, but I believe it is in every shareholders’ best interest to hire a qualified professional with valuation expertise. You can be assured that those professionals with valuation credentials have received specific valuation education, been tested and peer reviewed. Credentials in our profession are a bit of alphabet soup but the three most common are:
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.