Valuing the Interest

April 13, 2006

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In a buy-sell agreement, which is an important part of properly establishing your business entity, a method for valuing the business interests must be written into the document.

After all, in the world of commerce, everything has a price. The problem is, most people have a hard time agreeing on that price. What is valuable to one person may have little value to another.

In addition, a business is comprised of any number of variables, each possessing its own values. As with any major purchase, a deal usually has to be negotiated to reach the final price.

To simplify the buy-sell process and ensure fairness for all owners, the buy-sell agreement should specify how the owners' interests are to be valued. Essentially, there are three choices:

Warning

Caution must be used in the selection of any formula because of its finality. If the parties have agreed to the formula, it is extremely unlikely that a challenge of its result will be successful.