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What kind of valuation method will be in your buy-sell agreement?

On Behalf of | Jan 22, 2022 | Business Law |

A buy-sell agreement will enable you to maintain ownership of your business and protect it from outside interference.

Once you and your team decide on the kind of buy-sell agreement that is best, you must decide on the valuation mechanism to include.

Formula agreement

You can establish the value of your business through a specific formula derived from multiple of the business’s operations. This will provide specific calculations to determine the buy-sell price. However, the formula cannot provide a realistic valuation over time.

Fixed price agreement

You can establish a value for the equity of your business by setting a specific dollar amount for future purchases. Keep in mind that the fixed price will become outdated as the business evolves.

Business valuation agreement

For this kind of agreement, you can engage the services of a business appraiser to determine the price of future transactions. The agreement provides you with a structure for making such determinations. Rather than determining the worth of the business themselves, your co-owners can agree about the valuation process and what it should entail.

Next steps

Over time, the buy-sell agreement you initially created will likely change. Disputes may also arise between you and the other owners of the business in terms of content. There may be ambiguous meanings that require clarification. Do not hesitate to seek legal guidance. Protecting your interests is a priority. A review of the agreement will likely uncover the problem areas and set you and your team on the path to workable solutions.