Sometimes an agreement calls for one of the principals to set a price with the understanding that he will sell to the other principal or buy out his position for the same price. This may place the principal who has access to a greater amount of cash in a more attractive position. This principal offers a lowball price which the other principal cannot match because of his liquidity or lack thereof.

A good agreement includes a clause that requires revaluing the company each year. Principals often fail to revalue or the value is too low for the acceptance by the IRS for estate tax purposes. This may place the heirs in the position of paying more estate tax then the shares are worth.

The challenge arises when appraisers attempt to value the intangibles such as the tradename, patents and copyrights. It is relatively simpler to value receivables and equipment. A leasehold, (the value of a long term lease at a low rental) is more difficult but usually can be eyeballed by a good real estate appraiser.

The investment in a periodic appraiser reduces the difficulties that are encountered when a divorce is imminent. One of the principals feels that he or she is contributing more to the company than the other. Such a situation unfolds, perhaps because of the influence of one of the spouses or the desire to employ children. It is not unusual for the principals not to agree on the competence of the children. Also, children come into the company when most of the growing pains are history, and can't appreciate the sweat equity of the parents--the founders.

Obviously, a buy-sell agreement is a must and should be accomplished early on. The agreement can't solve all the problems, but it will reduce the challenges.

A Buy-Sell Agreement - The Basis For An Easier Parting Upon Death Or Split-Up

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