I have previously written about this case in New Jersey regarding fixed price agreements (Estate of Cohen v. Booth Computers, Memorandum Decision, C.A. Docket No. BER-C-135-08 (N.J. Super. Ct. 4 August 2009). However, the original partnership agreement, concluded in 1978, did define a pricing formula in paragraph 16: for an enterprise auditor, fair value may mean that certain valuation discounts should apply to the value of a non-dominant or “minority” interest. These discounts reflect the non-dominant nature of participation and may also reflect the lack of market capacity of a participation for a private company. When these haircuts are applied, the value of a non-dominant share is significantly lower than that of a dominant share. In order to avoid pitfalls in the design of purchase-sale contracts, contractors should consult with lawyers and accountants as well as business auditors to ensure that the language of the purchase-sale contract is consistent with the intent of the owners and that all owners understand the impact of these definitions. Sometimes buy-sell agreements only require evaluations after the triggering event has occurred.
for example: “When a triggering event occurs, both parties call in an expert to evaluate the participation of the owner who sells his stake. If the valuations are 10% of the other, the values are average, and this average is the transaction price at which the interest is bought. If both valuations are outside of 10% of the value of the other, a third appraiser is selected and this valuation is used to determine the value of the transaction. “In such a case, the third expert can help determine the final value, but sometimes these situations end in court because one of the parties feels betrayed. A typical example: two business partners have entered into a buy-sell agreement that sets the price at net book value plus 50,000 $US. Upon the death of a partner, the surviving partner was able to acquire the shares of his deceased partner for nearly US$200,000 – although its market value increased to more than US$11 million. Assuming that A, B and C hold shares in a company and wish to enter into a cross purchase contract. A cannot transpose a directive on his life to B (and vice versa) to start the agreement without causing a transfer of value. . . .