The Critical Safety Net: Why Every Multi-Owner Business Needs a Thoughtful Buy-Sell Agreement
Most owners naturally focus their energy on growth, operations, and customers. Yet in a multi-owner business, one of the most important planning tools is often overlooked: the buy-sell agreement.
At its core, this document provides clarity when ownership must change. It protects relationships, preserves continuity, and prevents emotionally charged decisions from shaping financial outcomes. When structured well, it becomes less a legal formality and more a governance framework that safeguards optionality for all stakeholders.
The Risk of Passive Planning
Many companies technically have an agreement, but few have one that reflects current realities. Businesses evolve. Personal priorities shift. Ownership expectations change.
Documents drafted years earlier frequently fail to address lifetime trigger events such as:
Divorce
Bankruptcy
Voluntary or involuntary departure
Retirement
When these situations arise without clear guidance, transitions can become adversarial, uncertain, and financially disruptive.
Establishing a Clear Standard of Value
A central question in any buy-sell structure is valuation. The challenge is not simply determining value, but defining how value will be measured.
Standard of ValueContextFair Market ValuePrice a hypothetical financial buyer would pay under typical market conditionsInvestment ValueReflects premiums strategic buyers may pay due to synergiesBook ValueAsset-minus-liability calculation, often relevant in liquidation scenariosHistorical ValueOriginal purchase price, typically disconnected from present realityAgreed ValueA predetermined number set by owners for future transactions
The objective is not selecting a universally “correct” standard, but eliminating ambiguity so expectations remain aligned before a triggering event occurs.
Timing Matters More Than Many Realize
Business value is dynamic. The valuation date can materially influence outcomes, particularly when unexpected events occur.
Key considerations include:
Effective Date
Should value be determined at the moment of the trigger event, the prior reporting period, or another predetermined point?Subsequent Events
Will the valuation reflect only information known at the effective date, or incorporate material developments discovered afterward?
A fair framework often requires clarity on how known and knowable information is treated, preventing disputes over hindsight adjustments.
Partial Interests Are Not Proportionate Interests
When an owner exits, the transaction typically involves a minority stake. Market realities recognize that partial interests carry reduced control and limited liquidity.
Valuation professionals frequently apply:
Discount for Lack of Control
Discount for Lack of Marketability
These adjustments can materially affect buyout economics. The decision to apply or exclude such discounts should be addressed proactively rather than negotiated during a stressful transition.
Funding Determines Feasibility
A valuation without a funding strategy offers limited practical value. Common funding approaches include:
Insurance proceeds
Borrowed capital
Installment payments funded by company cash flow
Importantly, the funding method can influence value itself. If a departing owner is integral to customer relationships or operational stability, the company’s value may change immediately upon exit. Agreements should anticipate this dynamic and define whether valuation reflects pre-departure or post-departure conditions.
Selecting a Valuation Mechanism
Owners generally rely on one of three approaches:
Fixed Price — administratively simple but prone to becoming outdated
Independent Appraisal — objective and defensible, though potentially costly
Formula Method — based on revenue or earnings metrics, offering consistency but requiring careful calibration
Deferring valuation decisions until a triggering event introduces subjectivity precisely when objectivity is most needed.
Moving from Document to Discipline
A buy-sell agreement should function as a living component of governance rather than a static legal artifact.
Practical actions include:
Drafting an agreement if none exists
Conducting periodic reviews aligned with ownership goals and business evolution
Coordinating advisors across legal, tax, valuation, and insurance disciplines
Thoughtful preparation preserves choice, protects relationships, and reduces the likelihood that unforeseen events dictate ownership outcomes.
Contact us today for our FREE EBOOK: Reducing Uncertainty with a Well-Defined Buy-Sell Agreement at email@ennislp.com
