Certificate of Stated Value

By: Martin M. Shenkman, CPA, MBA, JD

A commonly used approach for valuing a closely held business in the event of disability, death or retirement is for the business owners (e.g., partners) to set a price for the company in a document called "Certificate of Stated Value". If anyone dies, etc. during the next year that value governs. This avoids the complexity of having appraisals completed. This approach is not without complications and issues. There are a myriad of approaches. Be certain to address in detail how this mechanism should work in the business governing document (shareholders' agreement, partnership agreement, operating agreement). The agreement should address in detail what should be done if there is a major economic or other change between the date the certificate was agreed to and a buyout under the price set in the certificate occurs. Also, address in detail what happens if the business owners fail to update the certificate as required (annually is common).

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