Business Buy-Sell Agreement FAQs
Guidance from a Central Valley Financial Advisor-
As financial advisors serving business owners across California’s Central Valley, we understand how important it is to plan ahead for ownership changes. A well-structured Buy-Sell Agreement protects your company, your partners, and your family by setting clear rules for what happens when an owner leaves the business — whether by choice or circumstance.
Here are answers to some of the most common questions we receive from local business owners:
1. What is a Buy-Sell Agreement and why do I need one?
A Buy-Sell Agreement is a legally binding contract between business owners that outlines how ownership interests will be transferred if certain events occur — such as death, disability, retirement, or voluntary departure.
It ensures a smooth transition of ownership, prevents disputes among partners or heirs, and helps maintain the continuity and stability of your business.
2. What types of Buy-Sell Agreements are there?
There are three primary structures:
Cross-Purchase Agreement: Remaining owners buy out the departing owner’s shares.
Entity-Purchase (or Redemption) Agreement: The business itself buys back the departing owner’s shares.
Hybrid (Wait-and-See) Agreement: Combines both approaches, allowing flexibility at the time of the event.
Your best option depends on your number of owners, entity type, and tax considerations.
3. What events should trigger a buyout?
Typical triggering events include:
Death or disability of an owner
Retirement or voluntary exit
Divorce or marital settlement
Loss of professional license
Disputes or deadlock among owners
Including the right triggers ensures that ownership transitions are fair and predictable.
4. How is the purchase price or valuation determined?
Your agreement should clearly define how the business will be valued at the time of a triggering event. Common approaches include:
A predetermined formula (e.g., multiple of earnings or book value)
A fixed price updated annually
An independent professional valuation (recommended for accuracy)
It’s important to specify the standard of value (e.g., fair market value) and whether any discounts for lack of marketability or control will apply.
5. How often should the valuation or agreement be reviewed?
We recommend reviewing your Buy-Sell Agreement at least every two to three years, or sooner if there are major business or ownership changes.
Regular reviews ensure the valuation reflects your company’s current worth and the agreement remains practical and enforceable.
6. How is the buyout funded?
Even a well-drafted agreement won’t work if there’s no funding plan. Common funding options include:
Life or disability insurance policies on each owner
Business cash reserves or sinking funds
Bank financing or installment payments
Funding should be structured so that a buyout can occur without financial strain on the business or the remaining owners.
7. What are the tax implications of a buyout?
The structure of your agreement and the buyout method can significantly impact your taxes — both personally and at the entity level.
For example, a cross-purchase may allow a step-up in basis for remaining owners, while an entity-purchase may not.
We work closely with CPAs and tax attorneys to ensure your Buy-Sell Agreement is tax-efficient and compliant with California and federal law.
8. Who chooses the appraiser and pays for the valuation?
Your agreement should specify who selects the appraiser and how costs are shared.
Often, the parties agree on one independent appraiser, or each side selects one and those two appraisers jointly appoint a third.
Clarity here helps prevent costly valuation disputes down the road.
9. What happens if an owner refuses to sell or there’s a disagreement?
A strong agreement includes dispute resolution provisions — such as mediation, arbitration, or buy-back clauses.
Some agreements also use a “shotgun clause” (also called a “Texas shootout”), where one owner offers a price per share, and the other must either buy or sell at that price.
These provisions protect the business from prolonged conflict.
10. How does California law affect Buy-Sell Agreements?
California’s laws on corporations, partnerships, and LLCs all influence how ownership interests can be transferred.
It’s essential to ensure your agreement complies with state statutes and tax rules, and that it’s properly executed by all parties to remain enforceable.
We recommend reviewing your document with both your attorney and your valuation professional.
11. When should a business owner set up a Buy-Sell Agreement?
Ideally, the agreement should be established at the time the business is formed or as soon as there are multiple owners.
Waiting until a triggering event occurs can create financial, tax, and emotional complications that could have been avoided with early planning.
12. How can Valley Valuations help?
At Valley Valuations, we help business owners across Fresno, Bakersfield, and the greater Central Valley create and maintain fair, well-defined Buy-Sell Agreements.
Our certified valuation experts determine accurate business values, clarify funding options, and ensure that your agreement supports both your exit strategy and your long-term business goals.
