Buy-Sell Agreements: How Words On The Page Define The Valuation
The wording in a buy-sell agreement that governs the calculation of the price at which the transaction will occur needs to be carefully crafted to avoid disputes and, potentially, litigation.
Chris Mercer explains the three basic types of buy-sell agreement and how price is described in each one. In a “fixed price agreement” the price may be set in the contract at a fixed value per share. But this does not take into account fluctuations in the value of the share and the price that shares are actually worth on the day of the transaction.
“Formula buy-sell agreements” may spell out the method of calculation of the price, but as many of the price inputs are subjective, there is scope here for either an improperly spelt out formula or a formula that cannot be applied without some element of discretion. The latter could also cause dispute.
In the “valuation process agreements” it may be left to two independent valuers to come up with separate valuation the average of which sets the price for the transaction. There may be further clauses governing situations where these two valuations are too far apart.