Valuations for buy-sell agreements.

The four valuation structures in buy-sell agreements

Buy-sell agreements typically set the valuation trigger in one of four ways, each with trade-offs.

Fixed price (“the business is worth $X”): Simple but rarely fair. The fixed price becomes stale within 12 months, leaving the departing party either overpaid or underpaid relative to actual market value.

Formula-based (“the price is 4x EBITDA”): Better than fixed but loses nuance. A formula captures general relationship but doesn’t adjust for changes in industry multiples, concentration, growth, or owner dependence. Most formulae are set at agreement-formation date and stay there for decades.

Appraised at trigger (“valued by a qualified appraiser when the event occurs”): Most accurate but slow and expensive. Typically takes 2–4 months and costs $5k–$15k per appraiser. Often requires two appraisers with a third tiebreaker if they disagree meaningfully.

Annual agreed valuation: The partners annually agree a valuation based on a methodology-grounded report. This is where Valuion fits. Fast, low-cost, and recent enough to be fair.

How the annual-valuation approach works

The simplest structure:

1. At the start of each year the partners run a Valuion Detailed report together and agree the number as the valuation trigger for the coming 12 months.
2. The buy-sell agreement references the annually agreed number. If a trigger fires (death, disability, retirement, divorce), the most recent agreed number is the starting point for the buyout.
3. An Annual Refresh Subscription at $79/year ensures the next year’s update happens on schedule.
4. If partners can’t agree on the Valuion-generated number in a given year, the agreement typically specifies a fallback to a qualified appraiser.

This structure works well for partnerships of 2–5 principals where trust is high and the valuation isn’t highly contested. For partnerships with contentious history or materially diverging expectations, a formal qualified-appraiser approach may be more appropriate.

Insurance-backed buy-sell structures

Many partnerships fund buy-sell obligations with life and disability insurance. The insurance pays the purchase price when a partner dies or becomes disabled, meaning the remaining partners don’t have to come up with capital suddenly.

The challenge: insurance policies are sized at purchase date. Over 10–20 years the business value grows while the insurance stays flat, leading to chronic under-insurance. The fix: review insurance coverage alongside the annual valuation refresh. If the business has grown 40% since the policy was written, increase cover correspondingly.

See our insurance valuation page for more on policy sizing.