Written by The Single Appraiser, Select Now and Value Now Buy-Sell Agreement* – The Third Gem!
Take a look at your buy-sell agreement or any other legal document which requires a valuation of the business you own. I am willing to bet these documents only require a valuation at some time in the future when a planned or unplanned event occurs. This is like agreeing to buy a piece of real estate in a few years into the future without knowing what the price it is today let alone at the time of purchase. This can cause problems at the time a buy-sell trigger event occurs.
Let’s break this down a bit more before we examine The Single Appraiser, Select now and Value Now approach recommend by Chris Mercer, ASA, CFA, ABAR and author of several books on business wealth management.
There are four questions to answer about business valuation appraisals in buy-sell agreements**:
- Who will do the valuation appraisal and how are they selected?
- How many different appraisals will be done? One, Two or Three?
- When will the appraisal be completed?
- What standard of valuation will be used?
Who is doing the valuation appraisal?
If it is not predetermined who is doing the appraisal in advance the parties involved must agree on who will do the valuation. This may be easy or a sticking point depending on the circumstances. This can take time and time is money.
How many appraisals?
Very often the buy-sell agreement calls for more than one appraiser and the final determination might be an average of the two. If the valuations are not close then a third appraiser might be called in to “break the tie” as it were.
When is the appraisal done?
Valuation is either proactive or reactive. If the valuation is done at the time of the trigger event it is reactive. It is also worth noting the valuation number might be a surprise to the concerned parties.
What standard of value will be used?
There are many ways to look at the value of a business. It should be specified in the buy-sell document what standard will be used as well as the level of value.
The Chris Mercer Approach – Single Appraiser, Select Now and Value Now
This approach has many benefits where the parties first agree on a single appraiser to do a valuation today and a buy-sell price is established with the agreement of all. Knowing the price today eliminates surprises and the right financial plan can be put in place to make sure the buy-sell is viable. If there is an agreement your business partner will buy you out at a certain price and they must have the financial resources to do so.
If the trigger event occurs tomorrow everything should be ready to go because the parties already know how much it is going to cost and how they are going to pay for it.
Every year a new valuation is performed and a new purchase price can be agreed on if warranted. Of course if there is a significant change mid year the business the purchase price can be amended as needed.
Knowing the amount and the terms in advance is far more useful to all concerned. This is why we like and promote this valuation approach for buy-sell agreements above all others. Yes it takes a bit of owner discipline to make sure the buy-sell agreement and the valuation are kept up to date but it is worth it in the long run. There will be fewer surprises and much less stress when a trigger event occurs.
Sometimes a simpler approach is the most effective.
This is the third and final gem from Chris Mercer in this series. We are grateful for his insights and generosity.
*From the book “Buy-Sell Agreements for Baby Boomer Business Owners” – Chris Mercer
**There are more than four elements/considerations for the business valuation however for this post we are mostly focusing on the selection of the appraiser and the timing of the appraisal.
Schedule a call with us to find out more about how to protect your most valuable asset with the Marshall+Viliesis Business Value Protection Planning™ System. We proudly promote the One Percent Solution, use the Ownership Transfer Matrix as a planning tool and recommend the use of the single appraiser, select now, value now approach in buy-sell planning.