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One of the most popular valuation methods used in buy-sell agreements is setting a specific formula in the agreement to determine value. Formula buy-sell agreements fix a single formula today for transactions that will occur at future dates.


The advantages of formula buy-sell agreements are that they are easy to understand, they are easy to negotiate and that they are generally inexpensive.


Formula buy-sell agreements also have significant disadvantages. The primary disadvantage is the difficulty of setting a formula that can provide reasonable and realistic valuations over time. This is due to the various changes that occur within companies, economies and industries. It is impossible to derive one formula that accounts for both balance sheet and income statement changes in the company over time. Formula pricing will almost always yield a conclusion that differs from the actual economic value of the company and may potentially lead to litigation, unhappiness and many other unfavorable results.


If you decide to use a formula approach in your buy-sell agreement you should:

  • Make sure that you and all parties affected by the agreement thoroughly understand how the formula works and how it will be used.

  • Calculate the formula value periodically so you will know what the buy-sell price would be if a trigger event occurred.

If you would like to discuss the issue of formulas in buy-sell agreements, please contact your Rea professional today.


- by Holly Taylor, CPA, ABV, AM (Columbus office)


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