Succession Planning - Why Use a Complicated Formula?

Many people believe that succession planning requires complexity in pricing shares and will somehow give a more accurate value.

Complicated formulas are very popular in shareholders agreements.

Many Shareholders Agreements have incredible pricing models because many people believe that complexity will somehow give a more accurate value.

This is rarely true.

A complicated formula is more likely to cause misunderstanding and possibly suspicion between purchasers and sellers.

Another downside in complicated formulas is that they often require the company to enlist the help from an accountant, lawyer and sometimes business valuator which can be cost prohibitive.

These costs often become a barrier to transition since the costs are often greater than the value of the share transaction.

Companies may put off transactions until the value is great enough to justify the costs involved in the transaction.

When the initial value of the purchase becomes too large, potential shareholders may become uncomfortable with such a large commitment.

Those same key employees may leave to pursue their career with others employees rather than wait and/or have to take on a very large stake in the company all at once.

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