Obtaining A Valuation To Form A Buy-Sell Agreement

December 2011       Download PDF      Print

Situation

A minority shareholder of a family-owned specialty hardware and mechanical component distribution company with over $15 million in annual revenue wanted to explore his strategic options for selling a 27% interest in the company. Members of management and existing shareholders, including other minority shareholders, had expressed their interest in purchasing these shares. However, there was no formal buy/sell agreement established for minority shareholders and generally no stipulations or restrictions on the transfer of such an interest. The company's owners saw the need for a business valuation as an integral part of crafting a formal buy/sell agreement that could be used in the current situation and for future transactions.

Engagement

Allied Business Group was approached by the company's management team and shareholders to perform a business valuation for the purpose of creating a buy/sell agreement that could be utilized for a transaction involving the 27% minority interest. We started the engagement by requesting and reviewing initial documentation which included annual financial statements and tax returns. An in-person management interview was conducted with three members of the management team. A separate phone discussion was also had with the 27% minority shareholder who resided in a different state so that all parties involved could openly discuss the history of the business, its operations, people, and financial performance.

Additional documentation including customer lists, budgets, and corporate documents were then requested based on these discussions with management. We were also required to make several "normalizing" adjustments to the company's reported financial statements such as adjusting the salaries of family members to fair market value, removing owners' personal expenses, and eliminating one-time, non-operating or unusual expenses. These pro forma adjustments materially affected the company's "real" profitability and subsequently the valuation of the business.

Valuation methodologies from the income and market approaches were employed and applied based on the specific company and the purpose of the valuation. Management had also requested that we determine minority discounts for the subject interest as discounts would be included in their buy/sell agreement since they may or may not be appropriate based on the actual purchaser of the interest. Multiple methodologies were used when estimating the discounts and appropriate company-specific circumstances were considered in the discount analysis.

Result

Upon completion of the valuation analysis and report, the Allied professionals assigned to the engagement presented the report to the company's shareholders and management team. Using our extensive real-world transaction experience, additional feedback was also given to the parties regarding how a buy/sell agreement, and potential transaction of the minority interest, could be structured. All interested parties were pleased with the in-depth analysis and insight provided by the valuation process and Allied's team.