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By: Patrick B. Mathis

The agreement may provide for the valuation of shares in the event of purchase through a variety of methods including:

1. Annual agreement of the shareholders and the corporation which is binding for a specified period of time;

2. By agreement of the shareholders and the corporation at the timing of a sale event;

3. By appraisal, with the appraiser to be determined by agreement of the involved parties or selection by other appraisers, designation by a third party or other alternatives;

4. By a specified formula for valuation.

The Agreement should specify whether potentially applicable discounts such as minority and marketability discounts should apply in the valuation so that the method for determining the value of the shares to be sold and redeemed is clearly stated.

For example, the agreement might provide that the value of the company is to be determined based upon its total market value and the value then divided by the number of shares outstanding to determine a per share value. This number should then be applied to the number of shares to be sold. This approach effectively results in no application of a minority discount and a shareholder would be entitled to receive his or her proportionate value of the enterprise as a whole.

On the other hand, the agreement may provide that a marketability and minority interest should apply in determining the value of the shares to be sold if appropriate. For example, a 30% block of outstanding shares in a corporation may be discounted from the value of 30% of the total value of the company because it represents a minority position without the ability to control the election of the board of directors, make major decisions regarding the merger or liquidation of the corporation, etc. and from a market standpoint would be discounted because of these lack of control factors. This approach would consequently result in a lesser value to a minority shareholder than the valuation based upon a percentage of the total value of the company without the application of any such discount.

If appraisers are utilized, the agreement may provide for the selection of one appraiser to determine the value or allow each party to secure an appraisal and if they are within a specified range of value agree to utilize the average of the two or, if they are substantially different, the two appraisers might select a third appraiser and the value is based upon the average of the two closest appraisals, or a similar approach.

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