When a buy-sell agreement calls for an appraisal to be performed, the vast majority (82%) of attorneys surveyed say a certified/credentialed business appraiser should do the valuation. The rest (18%) say the public accounting firm that regularly works with the company should do the valuation.
This is revealed in a survey of attorneys conducted by the DHG Forensics and Valuation Services group at Dixon Hughes Goodman LLP. Brian Burns and Chris Mitchell, both with DHG, discussed the survey results during a recent BVR webinar on buy-sell agreements.
Good news: Attorneys were also asked about the preferable methods to determine the purchase price that is incorporated into a buy-sell agreement. The most prevalent method is to have a business valuation professional perform the valuation upon a triggering event (cited by 43% of respondents). That’s “good news,” say Burns and Mitchell. About a third (39%) of respondents use a formulaic method contained in the agreement. The rest (17%) use a predetermined fixed price that periodically reviewed and adjusted by owners without the use of an external advisor.
When the buy-sell agreement calls for a formulaically determined value, the following methods are used:
- A fixed multiple of average EBITDA or net earnings over the prior three years (or some other period) (43%);
- A fixed multiple of, or an adjustment to, the book value of the company used for accounting purposes (9%);
- A fixed multiple of prior-year EBITDA or net earnings (4%);
- An average of one or more of the above methods (17%);
- A fixed multiple of annual sales (0%); and
- Other formulaic method (26%).
To access an archived copy of the webinar on buy-sell agreements, click here (purchase required).
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