A buy-sell agreement (or “buy-sell” for short) is a formal legal contract among a business’s owners that sets terms for transferring ownership interests. It gives owners, or the business itself, the right or responsibility to buy an exiting owner’s interest following a triggering event. Such events may include an owner’s death, divorce, disability, retirement, voluntary departure for another reason, or loss of a required professional license or certification.

Buy-sells are critical risk management tools for construction businesses with multiple owners. And the agreement’s valuation provision is especially important because it sets the purchase price for a departing owner’s interest. If your business has a buy-sell, make sure you understand this provision and review it regularly to ensure it still makes sense.

Negotiating a price

Valuation provisions can take various forms. For example, you and your fellow owners may simply agree to negotiate a buyout price whenever one of you leaves the business. This approach is cost-effective and lets you consider recent events when determining a fair price for your business interests.

The risk is that, when a triggering event occurs, you’ll be unable to reach a consensus or negotiate in good faith and end up in court. This is especially common if an owner dies and the deceased’s family ends up doing the negotiating.

One way to mitigate the risk is to set a negotiated price in the buy-sell and bring in an independent valuation professional only if you no longer agree on that price following a triggering event and can’t negotiate another one within a certain time frame. But that’s the thing about negotiated prices: They often become outdated over time and settling on another one can be difficult.

Applying a formula

Some buy-sells state a valuation formula in the agreement’s language that’s often tied to book value, earnings or other financial benchmarks. This approach offers simplicity and predictability. However, it’s also quite risky.

Book value, for example, may provide a convenient starting point for establishing value. But it often differs from fair market value and may significantly undervalue established construction businesses with strong earnings, customer relationships, backlogs or other intangible assets.

On a similar note, formulas based on earnings multiples may or may not reliably indicate value, depending on your construction business’s circumstances at the time of valuation. One potential solution is to revisit the formula annually and adjust it to produce a price the parties view as fair. But this is easier said than done and can be easily overlooked when you’re busy bidding on and completing projects.

Engaging a valuation professional

Some buy-sells call for periodic valuations (for example, once every year or two) and use the resulting price for any ownership interests transferred between that valuation date and the next one. Other agreements require the parties to engage a valuation analyst only when a triggering event occurs.

Under either approach, engage a qualified valuation professional to provide an objective estimate of your business’s value. And be sure to provide unambiguous guidelines for this individual. For instance, your buy-sell should define the valuation date. Some agreements set the valuation date as the triggering event. Others set it as the last day of an accounting period (say, the end of the most recent fiscal year or quarter).

The valuation date you choose can significantly affect the buyout price — particularly if the triggering event itself affects the business’s value. Using a period-end date may simplify the analysis by tying the valuation to an established reporting date. However, it can also produce a value that doesn’t reflect significant developments between that date and the triggering event. Your agreement should clearly establish which date applies and how intervening events will be handled.

In addition, the valuation provision should spell out:

• The valuation standard (such as fair market value, fair value or investment value),
• The premise of value (for example, going concern or liquidation value), and
• Whether the interest being valued is controlling or noncontrolling.

Because different valuation standards can yield different results, the agreement should clearly identify which one applies. You might want to address valuation discounts for lack of control or marketability, too. When applicable, these discounts can become a significant and contentious issue, so ironing out the details before a triggering event happens can help streamline buyouts. The agreement should make clear whether and under what circumstances such discounts apply.

Making the necessary adjustments

For construction businesses, factors such as backlog, work-in-progress, equipment and bonding capacity can significantly influence value, making a well-defined valuation provision especially important. Review your buy-sell regularly, perhaps as part of an annual leadership meeting, and adjust it as needed. We can help you gather all the relevant information and ensure the agreement remains aligned with your business’s current financial performance and strategic goals.

For more information about buy-sell agreements, read: Buy-Sell Agreements: Protecting Your Construction Business from Ownership Change

© 2026