If one sells a corporation, the shares of stock are what is being sold. If one sells a limited liability company, the membership interest is what is being sold. However, when one sells a sole proprietorship – a business which is not an entity– what exactly is being sold?
Generally speaking, the answer is that the assets are what is being sold. Some of these assets are easy to spot. For example, if the business has inventory; if it has vehicles or real estate, those can be the principal asset being transferred. Other times, especially in regard to a personal services sole proprietorship business (such as a doctor or lawyer’s practice), what is being sold is general intangibles. This can be everything from a copyright or a trademark to a right to collect money. These general intangibles are essentially the beginning and end of the value that of personal services sole proprietorships.
One of the more interesting dillemas is how to set a value on such general intangibles. Normally, this will be the central issue in determining the price for a sole proprietorship that does not have tangible assets.
A buy sell agreement is an effective tool to create a predictable value for shares in a closed (non-public) corporation. However, what happens if the buy sell provision refers to an exhibit that is not attached and the formula simply cannot be applied as intended in the agreement? The New York Appellate Division dealt with that issue in Sullivan v. Troser Management, Inc., N.Y.S.2d , 2010 WL 2636019 (N.Y.A.D. 4 Dept.), 2010 N.Y. Slip Op. 05894
That case was decided on July 2, 2010. “[T]he dispute … relate[d] to the value of an 18% stock interest in a ski resort under the parties’ “buy–sell” agreement (“agreement”).” The Court held that “the purchase price provision of the agreement [was] unenforceable, and the value of plaintiff’s stock should therefore be determined pursuant to the formula set forth in the unrelated New York case, Lewis v. Vladeck, Elias, Vladeck, Zimny & Engelhard(57 N.Y.2d 975), i.e., based on a percentage interest in defendant’s assets.” Id at 1.
The Court concluded that “[t]he ‘Purchase Price’ provision of the agreement expressly states that the price of the shares of stock shall be ‘an amount agreed upon annually by the Stockholders as set forth on the attached Schedule A.’ It is undisputed that no Schedule A exist[ed]. That provision further state[d] that, ‘[i]n the event that no annual value is established, the value shall be the last agreed upon value except that if no such agreed upon value is established for a period of two years, the value shall be the last agreed upon value increased or decreased by reference to an increase or decrease in book value of [defendant] from the date of the last agreed upon value to the date of death or disability” of the stockholder seeking to sell his or her shares.’ Id at 1
The problem was that “the stockholders … never agreed upon a value of the stock, and … the purchase price of [the] shares therefore [could] not be ascertained in accordance with the terms of the agreement… Indeed, there is no evidence in the record that plaintiff has ever agreed upon a value of the stock. Id at 2
Therefore, the method of valuation was based solely on a percentage interest (in this case, 18%) in the assets of the ski resort.