Buy-Sell Agreements and Divorce: Why the Formula in the Agreement Isn't the Answer
If a business has a buy-sell agreement, someone will point to its price formula and say the question of value has been answered. Sometimes it has. More often the formula is one piece of evidence, and its weight depends on how it was set and whether anyone ever followed it.
Two separate questions
Does the agreement set the value for the divorce? The spouse is not a party to the agreement, and courts differ on how much a price set between the owners binds the marital estate. Confirm the approach in your jurisdiction.
Does the divorce trigger the agreement? Many buy-sell agreements restrict transfers to a spouse, and some give the company or the other owners an option to buy if a decree awards the interest to the spouse. That changes what each side can realistically receive.
The insight: the best test is whether anyone was ever bought out at the formula price
A price formula written years ago is a prediction. A completed buyout of a departing owner is a fact. If an owner retired, died, or left, and the company paid the formula price, the formula was tested. If owners left and the price was renegotiated, ignored, or never paid, the formula is a document and not a market.
Why formulas stop reflecting value
Stale price. Many agreements require an annual update that nobody performs. A fixed price set a decade ago says little about today.
Book value formulas. Book value tracks the balance sheet. It misses goodwill and earning power, and it can be far off in either direction.
Built-in discounts. Formulas often apply discounts that are a negotiated convenience among partners and not a market judgment.
Unfunded obligations. A buyout price that the company cannot pay without hardship is rarely the price actually paid.
Different prices for different triggers. A formula that sets a lower price for a divorce transfer than for death or retirement invites the question of why.
Red flags that point to a divorce-driven document
an amendment signed after separation, or while a divorce was foreseeable
a price far below what earnings would support
unsigned or partially signed amendments
no evidence the agreement has ever been followed
terms that apply only to transfers by divorce
What your expert needs
Every version of the agreement, with amendment dates; board or owner minutes that mention it; records of prior buyouts and what was paid; any insurance policies that fund it; and correspondence about updating the price.
How a good report treats it
It compares the formula result with an independent value, shows the reconciliation, and gives its reasons for the weight it assigns the agreement. It also addresses what restrictions on transfer mean for the spouse who is awarded value rather than the business.
Questions to ask your expert
Has the agreement ever been used, and at what price?
When was the price last updated, and by whom?
How does the formula result compare with your independent value?
Does the agreement treat divorce differently from other triggers?
What weight did you give it, and why?
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