A buy-sell agreement should be based on a current value of the principals' ownership interests in the business. A number of methods are used to establish a value, and many businessowners and professionals prefer working with their CPAs or accountants to arrive at a figure or determine which valuation method to use. However, the following approaches to setting a value for underwriting purposes may prove useful to your business disability prospects.
- Professional Corporations:
Use the sum of two times each principal's salary PLUS Book Value (assets minus liabilities), including accounts receivable.
- Professional Partnerships:
Sum of two times net partnership distributive income PLUS Book Value, including accounts receivable.
- Commercial Business:
Capitalization of earnings appropriate for the business as follows:
- Firms in existence three or more years, fluctuating earnings growth.
Five times the average of the last two years' earnings PLUS Book Value.
- Firms in existence five or more years, moderate earnings growth.
Seven times the average of the last two years' earnings PLUS Book Value.
- Firms in existence five or more years, significant earnings growth in each of the last three years.
Ten times the average of the last three years' earnings PLUS Book Value.
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