Business Valuation

Buy-Sell Agreement Valuation: What You Need to Know

When a partner exits, the buy-sell agreement decides the price. If the valuation method isn't right, the deal falls apart.

By Harry Prabandham3 min · 5 slidesUpdated May 3, 2026

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A buy-sell agreement governs what happens to ownership when triggering events occur — death, disability, divorce, retirement, voluntary exit, dispute, bankruptcy.
Without one, the surviving partners may end up in business with the deceased partner's spouse or heirs — usually badly.
The agreement should specify: who can buy, who must sell, valuation method, payment terms, and funding source.
Most small business buy-sells are silent or vague on valuation, leading to disputes, litigation, or business sales at fire-sale prices when triggers hit.

Fixed price: partners agree on a number annually. Simple but always stale and rarely actually updated.
Formula: e.g., 5× trailing 12-month EBITDA. Predictable but can produce absurd values during downturns or growth spurts.
Independent appraisal at the time of trigger: most defensible but slowest and most expensive (~$10K–$30K per appraisal, 60–90 days).
Hybrid: formula for routine triggers (retirement), independent appraisal for major triggers (death, dispute).
The 'right' method depends on the business's volatility and the partners' tolerance for ambiguity.

Lack of marketability discount (DLOM): private company shares can't be quickly sold — typically 15–35% reduction.
Lack of control discount (DLOC): minority interests can't direct the company — typically 15–25% reduction.
These discounts are negotiable and often disputed. The agreement should specify whether they apply.
The IRS scrutinizes discounts heavily for estate and gift purposes — be careful what you claim and ensure documentation is solid.
For a 50/50 partner buyout, neither discount typically applies — both partners had control and the buyer is purchasing control.

Life insurance on each partner — proceeds fund the buyout at death. Most common funding mechanism.
Disability buy-out insurance — separate policy for disability-triggered buyouts. Often overlooked.
Promissory note from the company or surviving partners — typically 5–10 year payout with market interest.
Sinking fund / cash reserves — partners contribute periodically. Tax-inefficient but flexible.
Without funding, even a perfect agreement fails — the obligation to pay exists, but the money to pay doesn't.

Review the buy-sell every 2–3 years and after any major business change (acquisition, capital raise, new partner).
Run a sample valuation under the current method — does it still produce a sensible number?
Confirm life insurance amounts still match the projected valuation.
Update the formula or fixed price if the business has materially grown or contracted.
If you don't have a buy-sell, get one. If you have an old one, update it. The cost of either is trivial vs. what's at stake.
Need a buy-sell valuation or review? Rubric Financial delivers buy-sell valuations and works with attorneys on agreement design.