Does the Distribution of Shares of Stock in a Family Business in Probate Require Valuation?

When a shareholder in your company passes away, his beneficiaries should receive his shares. The responsibility for distributing the shares falls in the hands of the probate court. The process is simpler if the deceased shareholder left a will that outlines how he wants his shares distributed. If he doesn't have a will, the probate court must decide how to distribute his assets to his heirs, including his shares in the family-owned business.

Probate Court

  1. The purpose of the probate court is to ensure the orderly distribution of assets and payment of creditors upon a person's death. If the decedent left a will, the probate court normally appoints the person named in the will as executor of the estate. The executor may be a spouse or relative of the decedent. The executor is responsible for gathering a list of assets and liabilities of the decedent and following instructions of the will. If the decedent did not leave a will, referred to as intestate, the court appoints an administrator to handle the financial affairs of the estate. The administrator pays off all debts and distributes the remainder of the estate to the heirs to the satisfaction of the court.

Independent Appraiser

  1. Before she can distribute shares owned by the decedent, the executor must take inventory of all assets. This means obtaining a valuation for all assets. Some items do not require professional appraisal, such as stocks owned in public company. However, because there is no active market for the shares in a family-owned business, the executor must secure the services of an independent appraiser approved by the court. Valuing the shares is important because the estate may have to sell the shares to the surviving shareholders to pay off the debts of the decedent.


  1. Valuation of a private company is part art and science. There are several methods, such as a price-earnings, cash flow and book value methods. In many instances, an appraiser draws upon sales of similar family-owned businesses to come up with a price for the business. To determine the worth of the shares of the decedent, divide the value for the company by the number of shares. For example, if the company is worth $5 million and has 1 million shares outstanding, the per-share value of the company is $5. Therefore, if the decedent owned 100,000 shares, the value of his shares is $500,000.

Buy-Sell Agreement

  1. Transfer and sale of stock is particularly important for a family-owned business to protect your interest in the case of death, disability or retirement of another shareholder. A buy-sell agreement specifies the terms for sale of the company's stock as a way to protect your interest as a surviving shareholder. The probate court honors the buy-sell agreement so long as the transaction is fair and adequate. Buy-sell agreements can be either a cross-purchase agreement or a redemption agreement. A cross-purchase agreement is when you take out an insurance policy on another shareholder. A redemption agreement obligates your company to buy the shares of the decedent at a predetermined set price.