A buy-sell agreement explains how ownership interest in a business may be transferred if an owner wishes to sell, retires, divorces, passes away or becomes disabled ("trigger events"). An effectively designed, written and funded buy-sell agreement can help avoid undue stress and financial problems at the trigger event. However, if the buy-sell agreement isn't supported by a business valuation prepared by an expert, it can be subject to protracted litigation. In fact, of all the elements in a buy-sell agreement there is one area that is litigated more than any other area - and it is the area of compensation paid to the departing stockholder in exchange for their stock. Such lawsuits are common because the disputed agreement was either silent or unclear about the method of valuation of the business, the process of determining the value, who will perform the valuation, who will pay for the valuation, and the timing of the payments for the stock.
DETERMINING VALUE
There are several ways to determine the value of a business for purposes of the buy-sell transaction in the agreement. These include:
- Fixed Price Agreement
- Formula Agreement
- Blind Agreement
- Process Agreement
AVOID AMBIGUITY
Ambiguity is the mother of litigation. To the extent possible, the valuation element of a buy-sell agreement should be carefully considered, discussed, and negotiated. The details of the agreement should then be described and recorded as clearly as possible in the buy-sell agreement.
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Since franchises by definition, are intertwined with a larger and greater entity, the valuation of an individual franchise is not as clear-cut as a stand-alone, independent business. There are a number of franchise-specific Issues that impact value, such as competitive advantages/disadvantages, relationship with other franchisees, capital infusion requirements, contract obligations with franchisor, product and marketing constraints, revenue potential, and operating costs. As such, business valuations for franchises require a knowledgeable and experienced valuation specialist.
The specialists in Arxis Financial's "Business Valuation" practice provide clients with a comprehensible valuation that carefully considers critical factors in the franchise context. Our clients benefit from having valuation professionals who understand the realities of market valuations much better than the purely theoretical practitioners, resulting in very defensible and clear valuations. Our experts are well-known in the industry and highly-respected for their depth of knowledge and resources.
Arxis Financial provides valuation expertise to determine the value of a business, the value of an ownership interest, and the change in value over a specified period of time. These valuation services are often performed in the context of commercial and civil litigation. However, there is tremendous value in a business appraisal in estate and gift tax planning and succession planning. Our specialists provide clients with a comprehensible valuation that aids attorneys, business owners, management, and financial planners in decision-making. We also have extensive experience in presenting and defending our findings in the context of litigation.
The Business Valuation practice is headed by partner Chris L. Hamilton, CPA, CFE, CVA. Mr. Hamilton is a Certified Public Accountant, Certified Fraud Examiner, and Certified Valuation Analyst. Mr. Hamilton has published articles in several publications, and has made presentations at national conferences, training institutes and seminars on topics including forensic accounting, fraud and business appraisal.
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