Part III: What Documents Matter Most In Determining Share Value in a Buyout? An Analysis of Key Documents and Why They Matter
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Different situations can lead to a corporate buyout. As a business move, a majority shareholder may seek to buyout the minority shareholders or one company may seek to acquire a majority of another company’s shares. Buyouts may also be contractually forced under a company’s governing documents or legally forced by courts pursuant to a statute. In the context of a forced buyout, if parties cannot agree to the share value, the court may have to make a determination as to the fair value of the shares. If the court is forced to make a determination of share value, the parties must provide competent, substantial evidence on which the court can make a determination. See Tucker v. Tucker, 171 So.3d 158 (Fla. 4th DCA 2015); Dolan v. Springlight Bottled Water Corp., 656 So. 2d 211 (Fla. 3d DCA 1995).
Whether the buyout is a product of a business decision or a court order, determining share value is an obligatory step precedent to the buyout. You must not only consider the company’s current financial situation, but also its financial history and future financial potential. This post is the third in a series of three posts that aim to provide an overview of the most important documents for evaluating an entity’s financial past, present, and future.
This post, Part 3, will provide an overview of the most important documents for projecting a company’s future financial status in preparation for determining the company’s share value in a buyout.
Why Is a Company’s Financial Projection Relevant to Determining Share Value in a Buyout?
A company experiencing success now will not necessarily be doing so in the future. Buying out a company may not be a good idea if the company’s outlook is dim. For that reason, it is important to gain an understanding of the company’s future prospects in addition to its current financial situation. It is important to predict the company’s post-buyout financial status in order to avoid conducting a buyout that will not be profitable. If the company will acquire a substantial amount of assets post-buyout, the fair value of its shares may increase slightly. On the contrary, if the company is likely to take on more debts than assets post-buyout, the current fair value of the shares may not be as high as if the company keep its assets to debt ratio the same as it currently is.
What Are the Most Important Documents for Projecting a Company’s Future Financial Status?
Many of the documents that can be used to determine a company’s current financial situation can provide insight into its future financial potential. These documents can include those evidencing any contracts or agreements to which the company is a party, the company’s ongoing expenses, and any potential agreements to which the company may become a party. Before projecting a company’s future financial status, you should request the following documents:
- Any buy-sell agreements, options to purchase stock, or rights of first refusal in effect at the valuation date
- Resumes of key personnel, with age, position, compensation, length of service, education, and experience
- Any contingent and/or off-balance sheet assets or liabilities as of the valuation date, including pending lawsuits, compliance requirements, warranty or other product liability, pension plan surpluses, etc.
- Number of employees and average salary, training, equipment, and recruiting costs, by position, as of the valuation date
- Detailed contract backlogs of as of the valuation date, including expected profit for each contract
- List of bids or proposals outstanding as of the valuation date, including total annual revenue if won
- Copies of lease agreements in effect at the valuation date
- Copies of other contracts, including employment agreements, covenants not to compete, supplier agreements, client agreements, royalty agreements, employee benefit plants, etc.
Why Are These Documents Important for Determining Share Value in a Buyout?
Requesting documentation of agreements in effect, backlogged contracts, and contemplated agreements will reveal what is ahead for the company. You will learn information regarding what the obligations the company will be taking on in the future. By looking at the terms of such agreements, you can also learn about and analyze the potential risks of entering into such agreements. Understanding the organization of employees, employee backgrounds, and employee compensation structures is useful in determining how much the company has spent on employees and will continue to spend on them in the future.
Requesting contingent and off-balance sheet assets and liabilities can be particularly useful for learning about things outside of the company’s financial statements that may affect the company’s performance in the future. For example, lawsuits are expensive, and a company gearing up for extensive litigation at the valuation date will soon face the costs associated with taking or defending legal action. If you are buying out the shares of a company, you should know whether the company will soon face extensive costs.
All of these documents will provide an overview of what assets and liabilities the company is likely to have in the time following the valuation date. Understanding this information, you can make a determination of the company’s share value based not only on the current status of a company, but also based on how successful the company is likely to be post-buyout.
This post, Part 3, concludes our three-part series dealing with the most important documents for determining share value in a buyout. Whether you are conducting a buyout of your own accord or conducting discovery in a buyout proceeding, requesting these documents help you gain an understanding of where the company has been, where it currently is, and where it is likely to be financially. Once you have gained such an understanding, you can make an educated determination as to what the company’s share value is and proceed with the buyout, confident that you have made a profitable decision. If you have not read Parts 1 and 2 of this series, please do so. In the litigation arena, if you and the other party are unable to agree upon a fair value for the company shares, these documents will provide competent, substantial evidence upon which the court can make a determination. When you are ready to conduct a buyout, obtain the counsel of a qualified attorney who will guide you through the share valuation and buyout processes.