THE IMPORTANCE OF BUY-SELL AGREEMENTS IN BUSINESS CONTINUITY

/in , /by Joe Orlando

For business owners, a well-structured buy-sell agreement is essential for ensuring a seamless transition of ownership in the event of death, disability, or retirement. These agreements define who has the right to purchase ownership interests and at what price, mitigating potential disputes among partners, heirs, and buyers.

Valuation: A Critical Component

A properly structured buy-sell agreement includes a clear valuation method to determine the fair market value of a departing owner’s shares. Common valuation approaches include:

  • Business appraisal – An independent assessment by a business valuation expert(s) based on fundamental business valuation methodologies and the prevailing market conditions.
  • Formula-based calculations – Methods such as EBITDA multipliers, revenue multiples, or asset-based valuations.

To maintain fairness and accuracy, business owners should:

  1. Select an appropriate expert to determine the appropriate valuation methodologies that reflect the company’s fair market value.
  2. Review and update valuation methodologies regularly to align with market conditions.
  3. Avoid outdated valuation metrics, which can lead to financial disputes.

Lessons from Pappas v. B & G Holding Co.

A failure to update valuation terms led to a four-year legal battle in Pappas v. B & G Holding Co.:

  • William Egan, a 50% owner of B & G Holding Co., passed away, leaving his interest to a beneficiary, Dean George Pappas.
  • A pre-existing buy-sell agreement required the surviving partner, Eugene Leogrande, to purchase the shares at a predetermined price.
  • Pappas contested the valuation, seeking a fair market assessment instead of the agreement’s preset formula.
  • The court upheld the buy-sell terms, requiring Pappas to sell the shares for $318,348—likely based on an outdated rent-multiple valuation method.

Key Takeaways for Business Owners

  1. Review Buy-Sell Agreements Regularly – Ensure valuation methods reflect current market conditions. Outdated figures can significantly undervalue or overvalue a business.
  2. Update Your Valuation Annually – Some agreements require annual updates. These updates allow business partners the opportunity to assess value within their strategic planning process to identify ways in which to grow value.
  3. Prioritize Fair Market Value – Formula-based calculations become stale with new market data. Failing to update them may force reliance on outdated formulas. Market-driven valuations promote transparency and fairness.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, and strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA, at 503-925-5510 or jorlando@exitstrategiesgroup.com.