Business Valuation Plays a Critical Role in Buy-Sell Agreements

Whether your company is a family-run operation, a partnership among friends or a multi-owner enterprise, a buy-sell agreement helps protect it in potentially disruptive “what if” scenarios, including death, disability, divorce, disputes or simply a change of heart. These events may trigger ownership transitions that, without proper planning, lead to costly conflicts and financial strain. How can you ensure a buy-sell works when it’s needed most? A solid business valuation framework helps an agreement withstand legal scrutiny and supports fair, efficient ownership transitions. An experienced business valuator can provide clarity in five critical areas. Determining the value of the business Knowing your business’s current value helps prevent unpleasant surprises. Whether an owner wants to exit the business or a tragedy occurs, a formal, unbiased valuation sets...

When to Consider Subsequent Events in a Business Valuation

Business valuators sometimes consider major events that happen after the valuation date. For example, what if a business is subsequently sold, files for bankruptcy, discovers new technological advances, or experiences a major fraud loss, data breach or natural catastrophe? Such events could potentially affect a business’s fair market value, but whether a valuator will consider a particular event depends on the facts and circumstances of the valuation assignment. “Known or knowable” principle In general, events that are known or knowable on the valuation date will be factored into a valuation. Or valuators might consider the risk that a particular event will happen. But there are several exceptions. For example, in Estate of Jung v. Commissioner (101 T.C. 412, 1993), the U.S. Tax Court concluded, “Actual sales made in...