Shareholder Buy – Sell – or – Operating Agreements
Every business with more than one owner needs an up to date Buy – Sell Agreement that adequately addresses key elements of how shareholder interests will be valued if events trigger the Agreement. For example, a shareholder buy-sell agreement may state that if a shareholder dies, the company will buy the decedent’s interest in the company at the fair market value of the interest, without a definition of fair market value, a reference to the definition, or the implication of this promise of value related to minority interests. In other words, the shareholders who signed the agreement probably don’t know what they agreed to.
To business appraisers valuing minority interests, the fair market standard of value implies the consideration of discounts for lack of control and discounts for lack of marketability. These discounts can reduce the value of a minority interest by 30 to 50%. The agreement also must provide for a mechanism, like key person insurance to fund the purchase of a shareholder’s interest in the case of the shareholder’s death.
The Buy-Sell Agreement should be prepared by an attorney, with a review by a business appraiser to ensure that the standard of value and level of value (e.g., minority interest in a private company) are adequately specified and explained.
