If you are buying or selling a CPA company, your sales contract should cover precisely, in full and simply these five essential terms and conditions. In many cases, purchase-sale agreements tend to use « fair market value » as the premise of underlying value. In this way, the value derived from a purchase-sale contract can be used for the planning of gifts and inheritance tax. In this scenario, the business waiver of the deceased co-owner would be redeemed by the surviving owners at a price and would be the value that would apply for the purposes of the estate tax return. However, True v. Comm`r (T.C Memo 2001-167) shows that formal methods can lead to conclusions below fair value. When a court decides that, in such a case, the taxpayer wanted to avoid inheritance tax, it may invalidate this assessment for inheritance tax purposes. As mentioned above, buy-sell agreements usually contain an appraising clause with the terms of the buyout and often a definition of value. « Fair value » and « fair market value » are two frequently used definitions of value, but they are distinct and different artistic terms.
They have a very different impact on the dollar value that an auditor or accountant would obtain to determine the value of a business interest. It is therefore important to define the value standard applicable to the purchase-sale agreement. Book value is more of an accounting concept than a measure of economic or financial value; it is the carrying amount of a company`s equity (i.e. its total assets minus its total liabilities). The advantage of using book value is that it is a simple method in which value is determined by looking at a company`s balance sheet. Normally, this balance sheet is drawn up by an accountant, but many SMEs only have tax returns for their accounts and do not have a formal audit, or even an audit. Thus, purchase-sale agreements may, using tax returns and book value, enter into a value based on accounting information that has not been established in accordance with GAAP. In one way or another, book values are often disproportionate to the economic market value of an enterprise. Purchase and sale agreements are useful instruments for ensuring an orderly transition of stakes in private companies. When properly designed and verified annually, they serve several advantageous purposes, such as.
(B.dem the purchase of an owner`s equity interest in the business due to a triggering event, voluntarily or involuntarily; limit owners to parties who want non-selling owners to have potential co-owners and business partners as potential co-owners; the provision of an agreed price at which the buyer and seller can transact before a conflict and distortions of valuation occur between the buyer and the seller; the provision of the agreed terms for the payment of the transaction price related to the sale; and additional owners binding on the provisions of the purchase and sale contract. . . .