Fair Market Value

When valuing a business interest as part of a buy-sell agreement, purchase at fair market value requires that the value of the entity's goodwill be included and that the entity's recorded assets be restated to fair market value. Both of these adjustments usually require an appraisal.

Clearly, purchase at fair market value is more equitable to the withdrawing owner. Purchase at book value deprives the seller of his share of the entity's goodwill and the appreciation in the value of the entity's recorded assets.

On the other hand, appraisals can be very expensive and, in certain cases, time-consuming. For this reason, when purchase at fair market value is desired, it is wise to provide in the buy-sell agreement that the parties may agree on "fair market value" informally, and that an appraisal is to be used only in the absence of an informal agreement among the parties as to the fair market value.

In addition, mediation and arbitration clauses in the operating agreement should also apply to any disputes that arise as to the valuation of an interest. This, in itself, may significantly reduce the cost (and time) that will be involved in assessing fair market value.