- Most commonly, Buy-Sell agreements provide for a purchase of shares based on book value. Book value is the difference in value between the assets and liabilities of the corporation multiplied by the shareholder’s percent of ownership.
- Using book value is almost always a problem. In virtually all businesses, book value is greatly less than the fair value of the shares, because book value does not include the good will or going concern value of the corporation.
If a Buy-Sell event is triggered, at what price do the shares sell? Most Buy-Sell agreements specify a price.
Almost No One Should Sell Their Business for Only for Its Book Value
In valuing close corporations, book value is entitled to little, if any, weight in determining the value of corporate stock, and many other factors must be taken into consideration unless that is the requirement in a shareholder agreement. Courts routinely enforce Buy-Sell provisions as written, even when there is a gross disparity between the price provided and a fair value. “[S]pecific performance of an agreement to convey will not be refused merely because the price is inadequate or excessive”, said one court. “The difference must be so great as to lead to a reasonable conclusion of fraud, mistake, or concealment in the nature of fraud, and to render it plainly inequitable and against conscience that the contract should be enforced.”
In order for a Buy-Sell agreement to provide some protection from shareholder oppression, the price must be set either by a third-party appraisal or by some formula that reasonably approximates a fair value — e.g. a percent of prior year’s sales or a multiple of EBITDA.
To discuss your NJ shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Shareholder Attorney