Most business partners have briefly reviewed their Buy-Sell Agreement while consulting with their attorney though I’ve found most of those attorney-client discussions tend to have been limited to quick-start legal provisions, which fall short of meeting their clients’ desired objectives. Oftentimes not all of the appropriate qualifying events are addressed. Then when provisions are triggered by a qualifying event, the full extent of the financial implications of such events weren’t previously explored and resolved in relation to their client’s financial plan. Sometimes the Agreement hasn’t even been executed!

The circumstances and needs of your business and personal lifestyles continuously evolve; thus the Agreement should be reviewed with your financial advisor for updates at least annually. When provisions aren’t adequately maintained to meet the needs of your present circumstances and a qualifying event occurs, it commonly results in partner quarrels, family infighting, unnecessary legal costs, expensive valuations, tax, liquidity and income problems. In order to reduce or avoid these frustrations, we need to explore what qualifying events your Buy-Sell Agreement should cover, what problems could arise if you don’t plan, and how you might achieve a seamless transition upon trigger.

Qualifying Events

The most commonly addressed qualifying events are death, disability and disputes. Other events that should be covered are divorce and retirement. Some of the issues faced are:

  • How is the business valued when such an event occurs and how is it financed?

  • How do you structure provisions to achieve the most tax efficient outcomes?

  • When must notification of a qualifying event be provided to the members?

  • What restrictions are placed on to whom the stock may be transferred?

  • How do you define and who determines when someone is disabled?

  • How do you equalize various outcomes between the partners?


    Like just about everything else within the Agreement, the how and why of your business’ valuation depends upon your unique circumstances. Sometimes it doesn’t even make sense to maximize its value for estate and tax planning purposes. Valuing your business can be accomplished several ways such as the the capitalization of earnings method or the net asset value method. Niche businesses tend to be valued differently/higher in relation to strategic buyers as opposed to financial buyers. For the purposes of the Buy-Sell Agreement provisions, some valuation options include a fixed price, a formula or requiring an appraisal.

    An appraisal of your business’ valuation in accordance with Revenue Ruling 59-60 may even be required by an accredited professional because of tax laws surrounding equity compensation, estate and gift transfers. Some of the problems facing accredited appraisals include their cost, how much time they may take and that a reactive rather than a proactive valuation may be subject to dispute all the while you and/or your heirs may need to sell your equity fast for less than you want for income replacement needs. While a simple formula may be less costly and quicker, you’d gain extra insight from the valuation report, and it’s also likely that your assets, income and market position will fluctuate and cause the formula price to become misaligned.

    Short-term changes or one-time items may also skew the formula results such as a large purchase, tax adjustment, lawsuit, etc. Just like a stated fixed price, a formula would still need to be reviewed and updated periodically into alignment with your new reality. Once you determine how your business’ value is calculated and how much it’s worth, where would you find the money to execute the purchase?


    When a partner exits, it’s not uncommon for total business income to plateau or decline for a period after the transition all the while you’ve acquired an extra cash outflow obligation probably at multiple years worth of your earnings due to the purchase. The circumstances would typically require you to have financing, insurance, investments or savings available in order to meet your newfound purchase obligation.

    Loans may be available when the unexpected occurs, but there may also be risk perceived at that crucial time and thus a lack of risk appetite from creditors to finance the purchase depending upon your circumstances. In the event of a partner’s death or disability, the purchase is commonly financed by life or disability insurance in order to help protect business continuity, simplify the transfer and ease the burden on your heirs while potentially building wealth for other endeavors by growing cash value within life insurance. Beyond the business, the insurances help protect your family from income loss if you’re no longer able to produce.

    A core purpose of the Buy-Sell Agreement is to resolve your family’s income replacement needs when the sale occurs. Thus the Agreement serves as a component of your estate plan and with it we should give consideration to your wills, trusts, other insurances, businesses, investments, income and taxes in review of your estate liquidity needs. If the Agreement and insurances aren’t structured properly, it could cause the purchase and/or the insurance to become taxable events that shouldn’t have occurred. Even if they are structured properly, there could still be tax consequences you need to keep in mind while designing the provisions. Thus alongside estate planning, I can help plan for your liquidity needs and resolve the tax efficiency of your Buy-Sell Agreement.


    There are many different ways to structure membership or stock ownership, your beneficiaries and insurance contracts, which can result in very different tax consequences. Having the company buy the stock interests results in very different tax consequences from another owner or a trust buying the stock interests. Life insurance may present transfer-for-value issues and it may be beneficial to remove it from your taxable estate to gain leverage. All the while, again, the tax consequences of the business owning the insurance or the business owners owning the insurance are vastly different. The tax consequences could be severe and eat up a significant chunk of your net worth especially if it’s not properly planned.

    When planning for your Buy-Sell Agreement’s valuation, liquidity and tax consequences, your overarching estate distribution plan should be reviewed because the financial implications don’t relate just to the business; they’re very personal. The consequences of a lacking Buy-Sell Agreement could be dream crushing to the business, its owners and their families, especially if it’s not structured properly and adequate funding doesn’t exist.

    In order to help ensure the value of your business and income are adequately protected, I have a Buy-Sell Agreement financial planning process to work through with clients. I also have a 5 phase financial planning process in order to help resolve your other needs at the same time through which Buy-Sell Agreement planning is included within the Business Exit Planning Focus; that process also includes cash flow, tax, investment, education, retirement and estate planning.

    Schedule a free 45 minute strategy session with me or complete the form below to discuss your Buy-Sell Agreement and financial planning needs.

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