All convenience and petroleum retailers want to receive full value for their business when the time comes to sell. Unfortunately, not all retailers have taken the proper steps to ensure they will receive the most value for their years of hard work.

Buy/sell agreements, which are written contracts between business owners for the sale and purchase of an owner's interest, help business owners lock in a value for their business according to the agreement's valuation formula. The goal of the agreement is to provide an orderly process for a business to pass from one owner to another for a predetermined price.

Although a written buy/sell agreement is a good first step, many business owners forget to periodically update their valuation formula. Others may not have had a solid valuation formula in the first place.

This puts enormous importance on selecting the method to calculate the value of a business, which often can be the difference between receiving "liquidation" value and fair market value.

By comparing three possible options, owners can see how much difference their choice can make.

Book Value Method
Book value, also known as net worth or owner's equity, is simply the total assets minus the total liabilities as shown on a financial statement. This method is sometimes referred to as the "liquidation" method and could also understate the true value of a business, as it does not account for goodwill, profitability or accelerated depreciation. For example:

Rick and Joe have been equal owners of a successful convenience store, ABC Inc., for 15 years. They have built tremendous goodwill in the community and are located in a rapidly growing area of town. This growth has caused the fair market value of their building to double. At the same time, they have depreciated the value of their assets in their financial statements to practically nothing.

Two years ago, the co-owners created a buy/sell agreement that legally sets
the buyout value to be "book value." The bank recently ordered a formal appraisal of the business, which establishes the fair market value at $1.4 million. The book value is currently $450,000 - a $950,000 difference.

Agreed Value Method
With the agreed value method, the buy/sell agreement calls for owners to periodically meet and formally set the value of the business. This new value is then amended in the agreement. For owners who chose this option, the management question becomes: "How long has it been since you agreed on a new value and changed it in your agreement?" For example:

Six years ago, Bill, John and Steve started XYZ Inc., a convenience store business that has done very well. They each invested $100,000 initially and the business has continued to grow each year due to their strong leadership. They now feel the business is worth $1.4 million and plan to open a second location in the near future.

When they started the business, the three owners entered into a legally binding buy/sell agreement and agreed to a value of $300,000. At that time, they agreed to meet annually and set the value of the business. Unfortunately, they have not taken time to revise the buy/sell agreement since it was created. If one of the owners dies unexpectedly, the business will be valued at $300,000 - a difference of $1.1 million.

Fair Market Value Method
The fair market value method determines the fair market value at the time of a buyout. It calls for an independent source to value the business, taking into account all factors, such as the current value of assets, liabilities, goodwill and profitability to allow the owners to determine the value they want to pass on to their families. Receiving fair market value is the preferred outcome for the business owner, heirs, partners or others with a stake in the business. This method ensures all interested parties receive the full value they deserve. For example:

Dave and Mark have owned M&D Inc., a successful convenience store, for 10 years. They felt it was important for their families to get the full value of the business, so they created a buy/sell agreement.

To "lock in" the fair market value, the owners agreed to include the following language in their buy/sell agreement: "The value of the business will be determined by the certified public accountant (CPA) regularly employed by M&D Inc., or, if M&D Inc. has not regularly employed a CPA, by a CPA selected by M&D for this purpose." If one or both owners die, their families will receive full value.

Choosing the right valuation method minimizes the likelihood that retailers lose value in their businesses. Convenience and petroleum retailers should always seek expert advice and assistance from specialized estate planning attorneys, insurance representatives and appraisers who know the industry and can help them make sure their valuation method locks in the fair market value of their business.

(This article is intended to provide general recommendations regarding risk prevention. It is not intended to include all steps or processes necessary to adequately protect you, your business or your customers. You should always consult your personal attorney and insurance professional for advice unique to you and your business. ©2006 Federated Mutual Insurance Company, all rights reserved.)