Buy-Sell Agreements Process-Busting Valuation Issues (Part 4 of 4)

(Excerpted from Chapter 20 of the book Buy-Sell Agreements for Closely Held and Family Business Owners)   Key Person Discounts It is indisputable that some owners are more important to a business than others. The term used in the valuation literature to describe this concept was called, historically at least, the “key man” discount. Now we use the term “key person.” In practice, it is appropriate to assess the riskiness of earnings in the discount rate. If there is a key…
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Buy-Sell Agreements Process-Busting Valuation Issues (Part 3 of 4)

(Excerpted from Chapter 20 of the book Buy-Sell Agreements for Closely Held and Family Business Owners) Marketability (or Illiquidity) Discounts Applied to Controlling Interests Many buy-sell agreements with valuation processes provide guidance suggesting that appraisers should apply no discounts because of the minority nature of any holding and that there should be no discount for the lack of marketability of shares. The purpose of this guidance is to attempt to lead to a financial control level of value (see Chapter 14…
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Buy-Sell Agreements Process-Busting Valuation Issues (Part 2 of 4)

(Excerpted from Chapter 20 of the book Buy-Sell Agreements for Closely Held and Family Business Owners) Tax-Affecting Earnings in Tax Pass-Through Entities Some appraisers believe S corporations are inherently more valuable than C corporations. They say, in effect, that since there is no corporate-level tax on earnings, the earnings should not be tax-affected for valuation purposes. Other appraisers, like me, believe S corporations should be valued as if they were C corporations. Earnings (and those of other tax pass-through entities) should,…
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Buy-Sell Agreements Process-Busting Valuation Issues (Part 1 of 4)

(Excerpted from Chapter 20 of the book Buy-Sell Agreements for Closely Held and Family Business Owners) This is not a book about how to value businesses. There are many books that address that topic, even some of mine. However, there are at least five valuation issues that can blow a buy-sell agreement process completely out of the water. I have seen each of the issues in disputed valuation processes where there have been disagreements over: The appropriate level of value Embedded…
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New Article: The Ideal Time to Review Your Buy-Sell Agreement

This article, authored by Nick Heinz of Mercer Capital and drawing on the information found in the book Buy-Sell Agreements for Closely Held and Family Business Owners, discusses the ideal time to review your buy-sell agreement. The time for a comprehensive review of your buy-sell agreement is not this year or this month – it is right now. You have finished the first quarter of the year (and the end of the second quarter is fast approaching). Make it a…
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Buy-Sell Agreements Article in The CPA Journal

In the June 2011 issue of The CPA Journal magazine is the article "Buy-Sell Agreements: Business Owners Benefit from Planning Ahead" by Chris Mercer. This is a comprehensive article and one we hope you will read. You can link to the entire issue here. Skip to page 64 to read the article.
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Four Real Life Buy-Sell Agreement Examples to Avoid

I’ve reflected on the many buy-sell agreements I’ve reviewed in recent years. Let’s focus on four that have issues with either what appraisers call the “level of value,” or with appraiser qualifications. Any facts have been altered to protect the innocent (or guilty) as the case may be. Family business, buy-sell agreement drafted in the early-1980s. A family member dies and the buy-sell agreement is triggered. Everyone assumes that the valuation called for in the agreement was at the nonmarketable…
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Third Appraiser Selection in Multiple Appraiser Valuation Process Buy-Sell Agreements

The purpose of the third appraiser in multiple appraiser valuation process buy-sell agreements is to bring the process to a conclusion. Sometimes, things just aren't queued up for him or her to do the job without some adjustments to the process. Choosing the Third Appraiser Over the last several years, I've been involved in several multiple appraiser valuation processes as the third appraiser. These experiences provide the basis for a few ideas to "fix" a process that is already underway…
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Your Buy-Sell Agreement Won’t Work

Chapter One of my book, Buy-Sell Agreements for Closely Held and Family Business Owners, is entitled "Your Buy-Sell Agreement Won't Work."  When I speak of "your" buy-sell agreement, I'm referring to your agreement if you are a business owner.  Readers of this blog know, however, that I also talk directly to advisers of business owners.  So your clients' buy-sell agreements likely won't work, either. Before we address the why's of my seemingly bold statement, let's agree that if I'm right,…
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