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Valuation for Drop Dead Buy-Sell Agreement

March 7, 2013

I received a number of calls about valuing the business in the “Default” Drop Dead Buy-Sell Agreement I wrote about Tuesday.


Here is a method you can consider.


The big picture, and urgency, is the necessity of getting an agreement that covers death and disability of the co-owners.  For that, a payment amount and terms need to be agreed to (understanding that either party could be on either end.)  To accomplish this you need to arrive at a number that you both think is reasonable. Not a number you would sell the business for, value a transfer to a successor or family member, to fund a retirement, or for the myriad reasons stock would be transferred. The purpose of this agreement is to avoid conflicts between the remaining owners and the family of the deceased or disabled owner and to allow the remaining owners a reasonable way to make the payments.


A simple method is for the partners to agree on an amount and terms they would be willing and able to pay and would feel comfortable for their family receiving.  A second way is to work with your CPA, attorney or a valuation specialist to assist in the determination of the amount, terms and location of the cash flow payments.  Keeping in mind the limited purpose of the agreement, this could be done relatively easy. Your attorney should prepare the actual buy-sell agreement.


To accomplish this, I do not believe you would need a formal conclusion of value.   If the transfer is between relatives, a gift element or a tax based transaction, you would need a conclusion of value for the fair market value prepared in accordance with IRS rulings and requirements… but that is a different situation than I am discussing here.  If for some reason the IRS challenges the value, you can get a formal valuation then.  But, it would have no effect on the buy-sell transaction between the parties. You can also add (to the amount paid) that an adjustment would be made if there is a sale to a third party at a greater price within one year after the buy-sell transaction.


I have seen too many situations where an owner died or became permanently disabled and problems arose along with excess costs that could have been avoided if they signed a buy-sell agreement.  Make your life less complicated and reduce stress and consternation.  Get it done!

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