From a valuation standpoint, the lack of a buy-sell agreement—or one with a valuation provision that’s poorly drafted—can result in costly litigation and a painful falling out between business partners and/or family members. A recent case highlights what happens when a buy-sell goes bad.
New case: A company’s shareholder agreement included a buyout provision with a price based on a fixed per-share value. When the relationship of the owners deteriorated, the company exercised its buyout option at the fixed price, which had not been updated. Lawsuits were filed, and the court ruled that the shareholder agreement is enforceable and the fixed price is what should be paid—leaving someone claiming that person got the short end of the stick [Estate of Connie Collins v. Tabs Motors of Valley Stream Corp., 2021 NY Slip Op 32438(U)], which is available on the BVLaw platform).
This case is not uncommon—many buy-sell agreements do not adequately address the issue of valuation when an owner exits the firm. This represents an opportunity for valuation experts to review clients’ buy-sell agreements to identify potential problems, which could mean recurring business for the practice.
Our thanks to the attorneys at Farrell Fritz, who tipped us off to this case, which was featured on its blog, “New York Business Divorce.” Two of the firm’s attorneys, Peter J. Sluka and Peter Mahler, represented the prevailing parties in the case.
Extra: The February 2022 issue of Business Valuation Update shows how to turn this opportunity into recurring business—including the best way to design a valuation provision in a buy-sell agreement.
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