Valuation Process Buy-Sell Agreements

The valuation date should be defined in a valuation process buy-sell agreement.  Selecting a valuation date is necessary for the appraiser(s) to begin the assignment.  The valuation date will dictate what information is applicable to the valuation analyses.  For example, if the triggering event specifies that the valuation date will be as of December 31, then the valuation will be effective as of that date.  Future financial information will typically not be included (i.e. information after 12/31) in the analyses with the exception of items that are reasonably known or knowable as of the valuation date.  Additionally, the appraiser(s) will use the valuation date for other key elements of the valuation process.  For example:

·         Pinning down the subject company’s financial information;

·         Estimating the variables that are included in the cost of equity and debt; 

·         Selecting comparable companies / transactions in a market approach;

·         Economy analysis; and

·         Industry analysis.  

Further, the valuation analyses can get slightly more complicated if the valuation date is not on a calendar year end or fiscal year end. It is likely impossible to identify when a triggering event will occur in the future. However, if the date is defined in the buy-sell agreement, then there will be more clarity in the process and frame out what needs to be done. The parties can agree to a specific date after an event or specify that transactions in the company’s shares will be on a calendar year end. The point is to take steps to identify this critical date so there are no surprises.