Most business owners work hard to build something valuable. But many forget to check an important document: the buy-sell agreement. This agreement decides what happens to a business if an owner dies, becomes disabled, or leaves the company.
A recent case shows how dangerous a bad buy-sell agreement can be. One simple sentence caused a family to lose more than $11 million.
Shares worth $11.5 Million Sold for Only $178,000
A man who owned part of a New York investment firm passed away. His shares were worth more than $11.5 million at fair market value. But the company had a buy-sell agreement from 2003 that said something very different.
It said that when a shareholder dies, the company must buy that person’s shares at book value. Book value is the number on the balance sheet. It does not show what the business is really worth.
When the accountants calculated book value, they said each share was worth about $15,000. The total came to about $178,000.
The man’s family was shocked. They refused to sell at that price. They argued that the company had to offer to buy the shares, but the estate didn’t have to sell them.
The family took the fight to court, but they did not win. Both the federal district court and the Second Circuit Court of Appeals said:
- The buy-sell agreement was clear.
- The estate could not keep the shares unless the company failed to buy them.
- “Failed” did not mean the estate could say no. It meant the company didn’t have enough money to buy them.
Because the company did have the money, the courts ordered the estate to sell the shares for book value—no matter how unfair it felt.
Why Book Value ins’t a Good Way to Value a Business
Book value almost never shows the true value of a business. It often ignores things like:
- Growth
- Goodwill
- Client relationships
- Real earning potential
This means the first person who triggers the agreement—through death, disability, or leaving the business—is usually the one who gets hurt the most.
What You Should Do Now
If you own a business with partners, you should look at your buy-sell agreement right away. Ask yourself:
- Does it use book value?
- Does it explain how the value should be calculated?
- Would my family be protected if something happened to me?
If your agreement uses book value, you may want to update it before someone you care about pays a heavy price.
And if you don’t have a buy-sell agreement at all, your family could be left with confusion, conflict, and financial loss.
I’ve attached the decisions by the District Court and Court of Appeals if you’re interested in reading more. If you want help reviewing or creating a buy-sell agreement, I’m always here to guide you.