Market capitalization, often referred to as "market cap," is a measure used to evaluate the total value of a publicly traded company. It is calculated by multiplying the current market price of a company's outstanding shares by the total number of outstanding shares.
Market capitalization reflects the market's collective valuation of a company and is an important metric for investors, analysts, and companies themselves.
Market capitalization is typically categorized into three main groups:
- Large-cap: Companies with a market capitalization greater than $10 billion.
- Mid-cap: Companies with a market capitalization between $2 billion and $10 billion.
- Small-cap: Companies with a market capitalization below $2 billion.
Market capitalization is a dynamic metric that fluctuates with changes in a company's stock price and the number of outstanding shares. It provides insights into a company's relative size within the market and is often used for comparing companies within the same industry or sector.
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Choosing the right spouse might be the most important decision anybody can make. Perhaps the next most crucial decision is selecting the right business partner. This analogy is appropriate because business partnerships resemble our most sacred union in many ways. Business partners marry each other’s passions, visions, and shortcomings. The most successful partnerships are both complementary and interdependent.
Partnerships might span years or even decades with little interruption. Responsibilities evolve with business needs – one partner’s strength might be another’s weakness. This symbiotic relationship drives the business forward through good times and bad. Many view their business partner(s) as indispensable. Few plan for their absence.
What if something happens to your business partner? Consider the all-too-common scenario where one business partner dies without a buy-sell agreement in place. The former partner’s business interest passes to heirs with no active role or expertise in the company. This sudden change can create confusion, lead to conflict, and erode business value.
A buy-sell agreement prevents this undesirable scenario. Well-structured buy-sell agreements facilitate and fund the orderly transition between business partners and their family members.
Connelly v. United States is a 2023 legal case that involved the valuation of business shares in a buy-sell agreement. The case upended several longstanding precedents and highlighted new legal considerations for buy-sell agreements.
While the case awaits final judgement from the Supreme Court, business owners should note several important takeaways. Owners are encouraged to consult experienced professionals for specific guidance.
- A buy-sell agreement should have a clear valuation mechanism.
- A valuation or formula should be approved annually and memorialized in the corporate minutes.
- An agreement should be effective during life and at death.
- The funding vehicle should not be owned by the company, as the court ruled that corporate-owned insurance proceeds can increase the company’s value for tax purposes. This creates a discrepancy between the entity’s taxable value and its transfer value. It also invites potential litigation by departing partners or heirs, who may claim they are entitled to the difference.
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The Right-of-First-Refusal is a common provision in buy-sell agreements. This provision gives existing business partners the opportunity to purchase a departing partner's shares before they are offered to an outside party. The shares must be offered to existing partners at a specified price outlined in the buy-sell agreement. This protects existing owners by allowing the business to remain in their hands.
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