Whether shares of a family corporation's stock are to be purchased by the corporation or by the remaining stockholders, it is possible that neither will have sufficient, readily available funds to make the purchase. The problem of funding the purchase of deceased shareholders' stock may be addressed by purchasing life insurance policies on the lives of the shareholders. Market value would be a legitimate valuation, but it is often difficult to calculate. Family businesses are, by definition, closely held, with little or no liquidity in their stock. Thus, market value may be difficult or impossible to determine accurately.
Book value has the advantages of relative ease of determination and apparent objectivity.
However, care must be taken in situations where the book value may differ significantly from the actual economic value. This is true of companies with substantially appreciated assets that are carried on their books at acquisition cost. Additionally, situations may arise where the business's accounting methodology is questionable. Under a buy-sell agreement, an understated book value may cause a substantial hardship upon the estate of a deceased shareholder, while an overstated book value may unfairly hinder the efforts of the remaining shareholders to keep the business within the family. As with any estate planning issue, always seek qualified legal counsel before pursuing a business buy-sell agreement.