If a company has multiple owners, it will most likely have some form of a buy-sell agreement in place. A buy-sell agreement is designed to protect the interests of an individual owner’s estate as well as the interests of the other owners and the company as a whole. It also ensures that the owners don’t have to work with heirs that don’t possess the same passion or knowledge of the company as an owner had.

A buy-sell agreement is essential as it prepares for the unexpected and safeguards against potential losses from a key owner dying by establishing the rules for ownership transition. Finally, a buy-sell agreement protects the estate of the deceased owner by ensuring the heirs get paid from the proceeds of the life insurance policy an amount stipulated per the agreement.

The Business Valuation Provision and Why Formula and Fixed Price Approaches Don’t Always Work


One of the key components of any good buy/sell agreement is having an accurate means of assessing fair market value. There are a number of approaches that can be taken. For one, the owners could agree on a formula valuation, like a multiple of earnings. However, formula valuations can be inaccurate if the formulas aren’t updated. For example, a formula that worked well for when the agreement was made might not fit as well ten or fifteen years down the road.

The fixed price approach, in which owners agree on a price per share that can be updated later on, similarly, suffers from the same problems. If a company does wish to do a fixed price approach on a buy/sell agreement, the price of the shares should be negotiated and updated yearly to ensure the valuation isn’t too high or too low.

Finally, another approach that could produce the most fair and accurate valuation is a defined process approach. This valuation is one that typically includes an independent appraisal from a third-party valuation service provider. An independent appraisal ensures the valuation is unbiased and reflects the current condition of the company.

A Note about Intellectual Property Valuation


At Appraisal Economics, we provide asset valuation services for a variety of different business transactions. If the owners of a company have decided to use a defined process approach where there is an independent appraisal, the company’s intangible assets, like intellectual property, will also need to be assessed to determine the fair market value of a company. Our intellectual property valuation team can provide accurate valuations of intellectual property, such as trademarks, copyrights or patents, to ensure a company’s next steps go smoothly when a key owner passes away.