Typical Forms Used In Buy-Sell Agreements

Sometimes buy-sell agreements only require evaluations after the triggering event has occurred. for example: “When a triggering event occurs, both parties call in an expert to evaluate the participation of the owner who sells his stake. If the valuations are 10% of the other, the values are average, and this average is the transaction price at which the interest is bought. If both valuations are outside of 10% of the value of the other, a third appraiser is selected and this valuation is used to determine the value of the transaction. “In such a case, the third expert can help determine the final value, but sometimes these situations end in court because one of the parties feels betrayed. Approach to the formula. Shareholders using a formula typically apply a multiple to the previous year`s earnings or net earnings. For example, if companies in one sector typically sell for three times the turnover and the previous year`s turnover is 1 million $US, the formula would translate into a value of 3 million $US. It is hoped that the multiple represents all or part of the commercial value or goodwill or other intangible assets and that it results in a more accurate valuation than the book value or adjusted book value. Since a prohibition on the transfer of shares for life cannot be considered appropriate, shareholder agreements must draw a close line between maintaining control of the person holding shares and the non-excessive burden on the right of shareholders to sell shares. The most common mechanism for achieving a fair balance is to give the company and/or non-transferring shareholders the right to acquire shares of a transferring shareholder at the price that a third party is willing to pay.

If the commitment of the value of the shares is significant for inheritance tax purposes, the price of the shares offered to the company and/or non-transfering shareholders should be less than (1) the price offered by the third party or (2) the price applicable in the event of the death of the transferring shareholder. The agreement must have terms comparable to those concluded by persons in a competitive transaction. The final section 2703 test can generally be performed if the agreement could have been reached in a fair transaction between independent parties or if the restrictions are consistent with the usual practice of the transaction. . . .