A formal agreement can define an exit strategy and desired property succession plans and provide a roadmap in the event of death, divorce or disability, says Rachel Flaskey, senior manager in the Valuation Services Practice at Baker Tilly, one of the top 15 audit and consulting firms in the United States. A purchase-sale contract, also known as a buy-back contract, is a legally binding agreement between co-owners of a business that regulates the situation when a co-owner dies or is otherwise forced to leave the business or decides to leave the business.  Then, of course, a triggering event occurs. For example, if an owner dies unexpectedly and there is no current value certificate, the surviving owners (based on the purchase-sale contract) must redeem the deceased owner`s interests, which requires a value assessment. Considering the annual assessment as a kind of insurance premium helps homeowners understand why the annual appraise is an interesting business. It provides value before the triggering event occurs and before the parties are identified as buyers or sellers. The auditor provides the valuation report and the owners have the opportunity to read it, make comments and then have the value on hand. If a triggering event occurs later in the year, value conflicts should be reduced, since the parties have already agreed on a value. It is important to keep the valuation rules for buy-sell agreements up to date, as market conditions and other factors will change from year to year. Purchase and sale agreements are useful instruments for ensuring an orderly transition of stakes in private companies. When properly designed and verified annually, they serve several advantageous purposes, such as.
(B.dem the purchase of an owner`s equity interest in the business due to a triggering event, voluntarily or involuntarily; limit owners to parties who want non-selling owners to have potential co-owners and business partners as potential co-owners; the provision of an agreed price at which the buyer and seller can transact before a conflict and distortions of valuation occur between the buyer and the seller; the provision of the agreed terms for the payment of the transaction price related to the sale; and additional owners binding on the provisions of the purchase-sale contract. In the absence of a buy-sell agreement, business owners may face these and other scenarios that can disrupt the business and hurt its value. A lawyer should not only design and verify the buy-sell agreement, but accountants and business valuation experts should also review the valuation rules of the agreement to identify contradictory or ambiguous formulations before they are concluded. When evaluating, certain words and phrases have a specific meaning for the expert (as “fair value” and “fair market value”) and the occasional use of these words may lead to unintentional conflicts in the future. An expert can read the evaluation rules and make proposals that help identify ambiguities. These proposals could also address “uncontrollable” versus “control” values, discounts due to lack of marketing, and rebates due to lack of voting rights. Accountants and appraisers can help identify valuation language issues and help business owners and their lawyer choose a more accurate valuation language. “Fair value” has no common definition, but is used differently by accountants, lawyers, and courts….