A buy-sell agreement may form part of a firm's partnership agreement, governing the terms of a partner's buy-out if the partner leaves or dies or a new partner wants in. A buy-sell agreement may also be used to determine the value for the transfer of shares in a stockholders agreement. In family law valuations, depending on the circumstances, it is sometimes appropriate to use buy-sell agreements.
In the valuation of professional practices, for example, the courts have held that a buy-sell agreement may be considered, but will not be determinative. Marriage of Slater (1979) 100 CaI.App.3d 241, 160 CaI.Rptr. 686. A recent case, Marriage of Nichols (1994) 27 CaI.App.4th 661,33 CaI.Rptr.2d 13, concluded that it was not an abuse of discretion for the trial court to value the husband's shareholder interest in his law firm based on the formula set forth in his firm's stock purchase agreement.
The Nichols stock purchase agreement excluded the value of accounts receivable and work in progress although in Marriage of Lopez (1974) 38 Cal.App.3d 93, 113 Cal. Rptr. 237, the court held that these should be included in valuing a law practice interest. The court in Nichols, supra, found that the stock purchase agreement, which the firm had consistently adhered to with every shareholder who had retired or left, was an appropriate valuation method in this particular case.
The Nichols court recognized that the law firm at issue was a large firm where the shareholder did not share in the firm's earnings, but was compensated as an employee based upon his own productivity and length of service to the firm. In assessing whether a buy-sell agreement should be determinative, the Nichols Court set forth the following criteria:
- The proximity of the date of the buy-sell agreement to the date of separation to ensure that the agreement was not entered into in contemplation of marital dissolution;
- The existence of an independent motive for entering into the buy-sell agreement, such as the firm's desire to protect all partners from the possible effects of a partnership dissolution; and
- The similarity of the value resulting from the agreement's purchase price formula to the value produced by other approaches.
Mrs. Nichols was, however, awarded an interest in her husband's professional goodwill. The court reasoned that the stock purchase agreement did not determine the lawyer's goodwill, and that Mr. Nichols had personal goodwill whether he remained with the firm or not. In effect, the court said, goodwill cannot be eliminated merely by a recital in a buy-sell agreement. "It is a community asset because husband's experience, reputation and skill, which enabled him to command this high income, were developed while he was married to wife. It directly creates excess income for husband whether he stays with his firm or strikes out on his own" Marriage of Fenton (1982) 134 CaI.App.3d 451,463, 184 CaI.Rptr. 597.
Because Nichols upheld a buy-sell agreement as to accounts receivable and work in progress, but not as to goodwill, it appears that trial courts will have to examine carefully, on a case-by-case basis, the facts behind individual buy-sell agreements.