Sometimes buyback contracts require evaluation only after the triggering event; For example: “After a trigger event occurs, both parties will hire an expert to assess the participation of the owner who sells his shares. If the valuations are located in the 10% of each other, the values are average, and this average is the transaction price at which interest is purchased. If both valuations are outside 10% of the value of the other, a third appraiser will be selected, and this valuation will be used to determine the value of the transaction. In such a case, the third evaluator can help determine the final value, but sometimes these situations end up in court because one of the parties feels betrayed. Book value is an accounting concept and not a measure of economic or financial value; (i.e., the book value of a company`s equity (i.e., the total balance sheet decreased from its total liabilities). The advantage of using book value is that it is a simple method that determines value by looking at a company`s balance sheet. Normally, this balance sheet is compiled by an accountant, but many SMEs only have tax returns for their financial statements and do not have a formal review or even audit. Therefore, purchase-sale contracts with tax returns and book value can enter into a value using accounting information that has not been established in accordance with GAAP. In one way or another, book values are often unrelated to the economic market value of a business. Some repurchase contracts use formal valuation clauses that are simplified mixes of accounting information and valuation multipliers. For example, book value, 50% of revenue for the previous 12 months, seven times earnings or four times earnings before interest, taxes, depreciation and amortization (EBITDA). These formula agreements may result in a disparity between the outgoing owner`s transaction price and the fair value of those interests. The formula`s evaluation clauses are superficially the simplest, but the benefits of their simplicity can be offset by their inaccuracy.
The pros and cons of some common metrics are explained below.