Shareholder Agreements

It is essential to address critical valuation issues at the inception of a business. Every business with multiple owners should have an agreement that defines what happens when shareholders die, become disabled, depart the business, or disagree. ABA professionals can help you and your attorney define the terms of such agreements and review them to adjust for changes in your business.

Examples of issues that need clarification include, but are not limited to, the following:

  • How to value a minority interest.
  • How financial statements will be referenced (month- or year-end, number of years) and whether they will be averaged or weighted.
  • Whether book value represents unadjusted balance sheet values or market values.
  • Whether to use book value or market value for real estate, marketable securities, or other assets acquired by the business.
  • Agreeing on the definition of “assets” as tangible or intangible assets.
  • How earnings will be referenced, either as shown on the income statement or adjusted earnings that are managed to minimize taxable income.

Businesses change over time. You should review your existing shareholder or buy-sell agreement at least annually and consider these questions:

  • Does the agreement still seem appropriate and fair?
  • Will its stipulation for finding value produce a reasonable and fair outcome for the shareholders?
  • Will it produce a value which can reasonably be expected to be accepted by the IRS for gift or estate tax purposes?
  • Have separate entities been formed to own and lease assets such as buildings, equipment or other items to the corporation?
  • If your agreement’s stipulations regarding value are unclear, contact an ABA professional to discuss a valuation and to work with your attorney to amend your agreement.

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