Of ignorance and irony—one buy-sell ‘war story’

BVWireIssue #56-2
May 9, 2007

A two-owner company wanted to offer small equity buy-ins to its three employees.  They asked their auditor—who’d never valued a business before—to figure out a price; he found a book on BV and issued his report.  The shareholder agreement was drafted to buy out departing shareholders at fair market value “using the same methods as the original appraisal,” which turned out to be riddled with errors (but ironically arrived at a then-accurate value).

Fast forward eight years: The company has grown tenfold and is being courted by a publicly traded competitor at a price 10 times the original appraisal.  At the same time, an employee/shareholder leaves, and the company offers a buyout using an appraisal by the same CPA—who has since learned solid BV techniques. 

But the employee knows of the M&A discussion price (which is significantly higher than the offer) and hires an attorney, who reads the shareholder agreement and demands a new appraisal.  The same CPA reluctantly prepares a report (based on the same faulty methodology) that concludes a value LESS than the original buy-out price—and a lawsuit ensues.

“Needless to say,” says Bill Quackenbush (Advent Valuation Advisors, LLC), who submitted the story in response to last week’s request, “the fact that there were two attorneys who did not understand valuation, as well as one CPA/appraiser, was the root cause of several years and hundreds of thousands of dollars in litigation expense.”

What’s your buy-sell story?  Email the BVWire editor, and we could feature your story (and its solution) in BVR/Mercer Capital’s three-part special series on buy-sell agreements, which begins May 24, 2007

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