Putting a Price on Your Share: Valuation in a Buy-Sell Agreement

Your buy-sell agreement says that if a partner dies, the business or the other owners buy their share.

Good. Now the real question: at what price?

If the answer is "whatever we wrote on page 6 back when we started," you might be sitting on a fight. One side thinks the number is too low. The other side can't afford it if it's too high. And the family of the partner who died is stuck in the middle.

I'm Harvey Baker Jr., a licensed Texas agent in McKinney. I work with North Texas owners running businesses of about 5 to 50 people. Here's how valuation works in a buy-sell agreement, in plain English.

Why the price matters so much

A buy-sell agreement does two jobs. It decides who buys a share when something happens, and it decides what they pay.

Most owners spend their time on the first part. The second part is where things go sideways. A bad number can mean:

• The family gets shortchanged and feels like they were robbed.

• The remaining owners overpay and drain the business to cover it.

• Everybody lawyers up because the agreement didn't settle it.

• The funding doesn't match, so there isn't enough cash to close the deal.

The three common ways to set the price

There are a few common approaches. Your attorney and CPA will help you pick, but you should know what you're choosing between.

1. Fixed price

The owners agree on a dollar value and write it into the agreement. It's simple and easy to understand.

The catch: businesses grow, shrink, and change. If nobody updates the number, it gets stale. Many agreements say the owners will update it every year. Many owners never do.

2. Formula

The agreement sets a formula, like a multiple of earnings or book value, so the price moves with the business.

The catch: a formula that fit when you started may not fit later. Book value can miss what the business is really worth, and an earnings multiple can swing with one good or bad year. Somebody has to agree on which numbers go into it.

3. Appraisal

When the triggering event happens, a qualified business appraiser determines the value. Some agreements use one appraiser. Some let each side pick one, with a third to settle a gap.

The catch: it takes time and costs money, right when everyone is grieving or stressed. And until it's done, nobody knows the number, which makes funding harder to plan.

Some owners combine these, like a fixed price that's updated every year, with an appraisal if it hasn't been.

The funding has to match the number

Here's the part people miss. Whatever price you land on, somebody has to actually pay it.

Life insurance is a common way to fund the death part of a buy-sell. But if your agreement says the share is worth one amount and the policy pays a much smaller one, the buyers have to come up with the difference. That might mean a loan, a payment plan to the family, or pulling cash out of the business.

That's why I look at the agreement and the coverage together. More on funding here: How to Fund a Buy-Sell Agreement With Life Insurance.

Hypothetical example for illustration only: Two partners own a Frisco landscaping company. They set a fixed price when they started and bought matching policies. Eight years later, the business has tripled in size, but nobody touched the agreement or the coverage. When one partner dies, the agreement still says the old number. His spouse feels shortchanged, and if they update the value now, the surviving partner has no cash to pay the difference. Everybody loses.

How the structure changes the math

Who owns the policies matters too. In a cross-purchase setup, the owners own policies on each other. In an entity redemption setup, the business owns them.

In Connelly v. United States (2024), the Supreme Court ruled that, in that case, life insurance proceeds a company received to fund a redemption counted toward the company's value for federal estate tax purposes. That's one reason many attorneys and CPAs are taking a fresh look at how buy-sell agreements are valued and set up. Ask yours whether it affects your agreement.

More on the two structures here: Cross-Purchase vs. Entity Redemption: Buy-Sell Basics in Plain English. If you run an LLC, this one's for you: Buy-Sell Agreements for Texas LLC Owners.

Questions to ask your partners this year

1. What does our agreement say the price is, and when was it last updated?

2. Does that number still feel fair to everyone at the table?

3. If we use a formula, does it still fit how the business makes money?

4. If we use an appraisal, who picks the appraiser and who pays?

5. Does our coverage line up with today's value, or the old one?

6. Who's on the hook for the difference if it doesn't?

7. When will we review it again? Put a date on the calendar.

A word on advice

Valuation, how your agreement is written, and how it's taxed are questions for your attorney, your CPA, and a qualified business appraiser. I'm not a tax or legal advisor, and nothing here is tax, legal, or valuation advice. The insurance side, making sure the money is there when the agreement needs it, is my lane.

Get your Gap Map (free, 20 minutes)

If you want a clean starting point, I built a one-page Gap Map: where your home, your business, and your exit still depend on one person. Three columns. Plain English. You keep it either way, whether you buy anything or not.

Call or text 430-373-7752 with the word MAP for a free one-page Gap Map. Or learn more at bakerlegacypartners.com.

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Insurance products involve costs, limitations, exclusions, and suitability considerations. This article is educational and is not tax, legal, securities, or financial advice.

Harvey Baker Jr., Licensed Texas Life, Accident & Health Agent, TX License #3470534. Coverage, eligibility, and rates vary by carrier and health.