QUESTION: 197

Buy-sell agreement may specify that the shares be valued strictly at their fair market value as:

Controlling ownership interests
At a proportionate share of the enterprise value with no discount of lack of control and/or no discount for lack of marketability
At a specified percentage discount from a proportionate share of total enterprise value
Both B & C

Answer(s): D

One unique aspect of the valuation provision in a Bu-Sell agreement, as opposed to other valuation problems, is the extreme uncertainty concerning when a future event that triggers a transaction under the agreement will occur. This is one of the key reasons why:

Is no single approach to the problem of establishing the price?
Is no single method for a buy-sell agreement that one can recommend as completely satisfactory for all situations
There is no negotiation among the parties
Independent outside appraisal

Answer(s): A,B

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QUESTION: 199

Most of the mechanisms for setting prices in buy-sell agreements generally fall into one or a combination of following categories EXCEPT:

Some type of formula based on the financial statements such as book value, some combination of such variables
Negotiation among the parties
Independent outside appraisal
Ambiguity as to the applicable valuation date

Answer(s): D

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QUESTION: 200

It is highly unlikely, in formula approaches for setting the price in a buy-sell agreement, that the price established by a formula at the time of signing will be even close to the value of the interest at the time of triggering event, which could be many years later. For these reason analysts:

Highly encourage the use of formulas in high-sell agreements
Highly discourage the use of formulas in high-sell agreements
Allow flexibility in approach
Do not allow flexibility in approach

Answer(s): B

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QUESTION: 197

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QUESTION: 200