By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner / Director of Valuation and Litigation Services
Email Jason
Key Points
- Buy-sell agreements work best when they evolve alongside changes in ownership, operations, and company value
- Unclear terms and triggering events can create disagreement during ownership transitions
- Periodic reviews help ensure the agreement reflects current business realities and shareholder objectives
A buy-sell agreement is one of the most important planning documents for closely held businesses with multiple owners, yet many agreements remain unchanged for years after they are initially drafted and signed. As ownership structures, profitability, and long-term goals ebb and flow, an outdated agreement can create uncertainty at the exact moment clarity is needed most.
Whether triggered by retirement, disability, death, or an ownership dispute, a buy-sell agreement provides a roadmap for ownership transitions. However, even well-intentioned agreements can create complications if valuation methods, ownership rights, or triggering events are unclear or outdated.
Why Do Buy-Sell Agreements Become Outdated?
Buy-sell agreements become outdated because businesses rarely stay the same over time. Growth, leadership changes, new owners, and changing financial performance can all affect how an agreement functions in practice.
Many agreements are created when a business is smaller, and ownership is simpler. Years later, the company may have more complex operations, a significantly different value, or differing ownership than when the agreement was originally drafted.
In some cases, the agreement may rely on outdated pricing formulas or vague valuation language that no longer reflects the realities of the business. Changes in tax planning considerations can also affect whether the agreement continues to accomplish its original purpose.
Common Areas That Create Problems
Unfortunately, many ownership disputes stem from ambiguity within the agreement itself. When key terms are unclear, owners and advisors may interpret the agreement differently during a triggering event.
A key provision in a buy-sell agreement is defining how the business will be valued. Agreements sometimes use terms such as “market value” or “appraised value” without clearly defining what they mean. These different valuation standards for value can produce materially different conclusions, creating confusion around methodology and expectations.
Triggering events can also become a source of disagreement if they are not clearly defined. These often include:
- Death
- Disability
- Retirement
- Divorce
- Voluntary/Involuntary departure
- Ownership disputes
The timing of these events can significantly impact the resulting value, especially if the agreement does not clearly establish the valuation date to use in connection with the event.
Ownership rights can create additional complexity. Not all ownership interests carry the same rights or level of control, and differences in voting authority or transfer restrictions may significantly impact value. If these factors are not addressed in the agreement, disputes may arise over whether to apply discounts for lack of control and/or marketability.
The Value of Periodic Reviews
Periodic reviews help ensure the agreement continues to reflect the realities of the business. A buy-sell agreement should not be treated as a one-time legal document that is signed and forgotten.
Reviewing the agreement regularly allows owners to evaluate whether:
- The valuation methodology still makes sense
- Ownership percentages have changed
- Succession goals remain aligned with the company’s direction
- Funding mechanisms are still appropriate
Many organizations incorporate an annual review of their buy-sell agreement and valuation provisions as part of their broader planning process, particularly when ownership transitions or significant business changes are anticipated.
How Does Valuation Support Better Planning?
Business valuation supports better planning by creating an objective framework for determining ownership value. Without a current understanding of value, owners may rely on outdated assumptions that no longer reflect market conditions or company performance.
A valuation can also help improve alignment among owners before a triggering event occurs. Rather than negotiating value during a stressful transition, owners can rely on a framework that has already been established and approved.
At Sponsel, our Valuation and Litigation Services team works with business owners to evaluate buy-sell agreements and assess whether valuation provisions remain aligned with the company’s structure and long-term objectives. The goal is not simply determining value. It is helping business owners create clarity, reduce risk, and support smoother ownership transitions over time.
Frequently Asked Questions (FAQ’s)
- How often should a buy-sell agreement be reviewed?
Ideally, business owners should consider reviewing their buy-sell agreement annually and whenever a significant ownership or business change occurs. - Why is valuation language important in a buy-sell agreement?
Different valuation standards and methodologies can produce significantly different values. Clear language helps reduce disputes and align owner expectations. - What happens if a buy-sell agreement is outdated?
An outdated agreement can create confusion, delays, and owner disputes during ownership transitions while failing to reflect the company’s current structure or value.