Valuations for most businesses have dramatically increased over the last few years. There is plenty of activity and cash in the M&A market. Industries (like engineering) have become targets for venture capital pushing valuations even higher. Many of the buy-sell agreements were set up when the business started, sometimes decades ago, and are no longer appropriate. Unfortunately, this is generally discovered when a buy-out is triggered.
Ultimately, the goal is for the departing shareholder (or their estate) to be fairly compensated and for the remaining shareholder(s) to have a workable situation moving forward. Many times, the buy-sell agreements are funded with life insurance and/or terms to allow the business to continue on. The problem is policies are purchased, premiums paid and never revisited. Will the current policies work with a much higher valuation? Is valuation mechanism in the buy-sell appropriate?
One way to solve the puzzle is to get a valuation, use a recent offer, or available sale data. Compare those numbers against the buy-sell formula and terms. Generally, selling to outside buyer yields a higher price than an internal transfer. We have clients who revisit and set stock prices annually.
Several years ago, we had a client pass away who had been involved in a business since it started. The business had significant value, but the buy-sell formula was book value. Unfortunately, his estate received the substantially less than fair value with no recourse.
Please call your Dent Moses advisor with any questions.