If you own or manage a private business, you’ve likely signed, or been advised to sign, a buy-sell agreement. These contracts are designed to give structure and stability to a business when an owner exits due to death, disability, divorce, or disagreement, but in litigation, we often find that the very documents meant to prevent disputes are the ones causing them.
We see business owners, professionals, and fiduciaries in complex disputes involving business interests routinely. One of the most common and misunderstood triggers for litigation? A flawed or outdated buy-sell agreement.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a contract that controls how ownership interests in a private company can be transferred. It usually sets rules for:
- Who is allowed to buy a departing owner’s interest.
- How the value of the interest is determined.
- When and how a purchase must occur.
These agreements aim to ensure smooth transitions and avoid surprises, but their effectiveness depends entirely on how they are drafted, updated, and enforced.
Why Buy-Sell Agreements End Up in Court
Buy-sell agreements become flashpoints when:
- An owner dies or divorces and his or her shares are transferred.
- A partner leaves the business under strained circumstances.
- An estate or trust inherits a business interest.
- Disputes arise over the price, timing, or process of a buyout.
While the intention of these agreements is to provide clarity, they are often ambiguous, poorly maintained, or applied in ways that raise questions of fairness and enforceability.
Four Common Pitfalls We See in Litigation
1. Outdated or Unclear Valuation Terms
Some agreements name a fixed price or use vague references like “fair market value” or “book value,” without explaining how that value is defined or calculated. Years later, when a triggering event occurs, the parties may be working from different assumptions, especially if the business has grown or declined. Many times a stated valued has not been updated in years or decades and grossly undervalues the business. Disagreements over value often become the core of the dispute.
2. No Agreement at All or Key Terms Missing
Many business owners assume they have protection, only to learn there’s no valid buy-sell agreement in place or that critical terms, like valuation or who is eligible to buy shares or what happens upon death, were never clearly outlined.
3. Disputes Over Fairness or Pressure
We often see buy-sell agreements challenged when one party claims they were pressured into signing, did not understand the terms, or were treated unfairly, especially if they were in a vulnerable position at the time. Agreements signed without legal review, or during emotional or financial stress, are particularly at risk.
4. Conflicts with Fiduciary Duties
When a trustee, executor, or business manager is involved, the buy-sell agreement may clash with his or her fiduciary obligations. For example, selling a deceased owner’s shares at a discounted price, just because the agreement says so, might violate his or her duty to maximize estate value for beneficiaries. This can create legal risk and exposure for fiduciaries who rely too heavily on the agreement alone.
Are Buy-Sell Agreements Always Enforced?
Not always. Courts generally respect well-drafted agreements between business owners, but they will scrutinize any contract that appears one-sided, outdated, or inconsistent with public policy. An agreement may be unenforceable if:
- It was signed under duress or without proper understanding.
- It lacks a reasonable method of determining value.
- It favors one party to the detriment of others, especially in fiduciary contexts.
- It imposes unreasonable limits on the transfer of ownership.
What Business Owners and Fiduciaries Should Do
For Business Owners and Partners:
- Review your agreement every few years.
- Ensure valuation methods are clear and current.
- Confirm that the agreement reflects how you actually want the business to operate in a transition.
For Fiduciaries, Executors, or Trustees:
- Don’t assume the buy-sell agreement is controlling.
- Analyze whether following the agreement complies with your legal duties.
- Seek legal advice before executing a buyout that may raise fairness concerns.
For Heirs or Family Members:
- Know your rights.
- If you inherit a business interest and feel a buyout price or process is unfair, you may have legal options.
Conclusion
Buy-sell agreements are meant to create stability, but without thoughtful drafting and periodic review, they can lead to costly, disruptive litigation. Whether you’re a business owner planning for the future or a fiduciary managing a transition, do not assume the agreement you have is bulletproof.
At The Glennon Law Firm, P.C., although we do not draft buy-sell agreements, we help business owners and stakeholders navigate these high-stakes issues with clarity, strategy, and experience when a dispute over one arises. If you’re facing a dispute or simply want to evaluate your legal position, we’re here to help. Contact us to schedule a confidential consultation today.
You may learn more about us and how we operate by visiting these pages: About Us and What Sets Us Apart. To learn more about topics that relate to this blog, you may want to review these other firm blogs:
The Mohawk Doctrine: What Business Sellers and Buyers Should Understand
When Fiduciaries Fail: Understanding Suspension and Removal in Trust and Estate Disputes
This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact our office directly.