Any Simple Ways to Set a Buy-Out Price?

Determining the proper price to use in a buy-sell agreement can be a challenge.   On the one hand, you generally want the price to be an accurate reflection of fair market value.  On the other hand you want the valuation process to be as inexpensive as possible.  And in every case, you are trying to create a valuation process now that controls the calculation of a buy-out price to be used upon the occurrence of a trigger event in the future.

Some companies use a formula to determine the buy-out price.  Typical formulas are a multiple of EBITDA or a percent of net book value.  Formulas appeal to some business owners because they are generally easy to apply, and avoid some of the expense of a full-blown valuation.   But businesses change over time, and there is no assurance that a formula will continue to provide an accurate valuation over time. 

Other companies use appraisers to conduct a business valuation.  These business valuations can be quite thorough and may involve multiple methodologies including: comparable publicly-traded company stock prices, liquidation value of assets and cash flow analysis.  These valuations can be extremely accurate, but may be more costly than new business owners think they can afford.

Other companies avoid the cost of the valuation process by drafting buy-sell agreements that prohibit transfer of ownership interests unless the transferring owner has first offered to sell his or her stock at the price offered by a bona fide purchaser.  By structuring the buy-sell agreement in this manner, the owners are avoiding the cost of an appraisal and are using an unrelated third party purchaser to set the value of the offered shares.    

Other companies go one step further and eliminate the need to find a bona fide purchaser by using a mandatory buy or sell provision.  This provision works as follows: Owner A offers to sell his stock to Owner B for X dollars a share.  If Owner B does not accept this offer, then Owner A must buy Owner B’s stock for the same price per share.  The theory is that this mechanism forces the parties to set a realistic initial offer price because the initial offer price can be used as a buy price or a sell price by the other party.     

If you want to talk about business valuation mechanisms or how to draft a buy-sell agreement please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Send a copy of SenneySays along to your to your friends.    

AND ONE MORE THING.  Domestic international sales corporations (DISC) continue to present tremendous tax savings opportunities.  To take advantage of a DISC, you need to manufacture a product that ends up being used for the first time outside the United States.  You can reduce your taxable income by the greater of 4% of export receipts or 50% of export income.   If you want to know more about DISC, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation