By Bruce McGechan, CVA — Fealty Business Valuations · Last reviewed 14 September 2026
Buy/sell agreements fail at the price. The trigger clauses usually work: death, disability, exit and deadlock are easy to draft. What fails is the machinery for turning the trigger into a number both sides accept, because the agreement fixed a price that went stale, named a formula that stopped fitting the business, or waved at “fair value” without defining it. An independent valuation process, written into the agreement before anyone needs it, is the fix for all three.
Exit planning founder Peter Christman estimates that half of all owners leave their business through one of the five Ds: death, disability, divorce, distress or disagreement. Your buy/sell agreement exists for exactly those days.
The most common failure is also the simplest. The shareholders agreed a price when they signed, promised to update it annually, and never did.
Chris Mercer, whose book Buy-Sell Agreements for Closely Held and Family Business Owners is the standard text, gives fixed-price agreements a chapter of their own. The problem is mechanical: a trigger in 2026 executes a price from 2019, and one party gets robbed by an administrative oversight. Whoever the stale number favours suddenly develops a deep respect for the sanctity of contract.
Formulas feel safer than fixed prices because they move with the accounts. Three times average earnings, or 1.5 times revenue, or book value plus goodwill.
They rot in a different way. Mercer’s blunt assessment, from his own casework, is that “no formula selected at a given time can consistently provide reasonable and realistic valuations over time”, because one multiple frozen at signing can’t track a business whose margins, risk and asset mix keep changing. The formula that valued your $800k startup sensibly can misprice the $4m business it became, in either direction, by a lot. Book value formulas are usually the worst offenders, since book value ignores the goodwill that’s often most of what an SME is worth.
The third failure hides in respectable-looking drafting: “the shares shall be transferred at fair value”, with nothing more.
Fair value to whom, at what level, discounted or pro rata, as at which date? The phrase is a trap because it has no settled meaning outside two specialist homes: the courts give it one shape in Companies Act disputes (typically pro rata, no discounts), and NZ IFRS 13 gives it another for financial statements. Mercer’s warning is that “the likelihood of a successful appraisal process falls to near zero if the standard of value is not clearly specified”, and I can confirm the odds from local experience. A minority parcel priced pro rata and the same parcel priced with minority and marketability discounts can sit 20% to 50% apart. A clause that doesn’t choose has quietly scheduled a dispute, and I’ve described where that dispute leads in: how to resolve a shareholder disagreement on price.
“A buy-sell agreement is no better than its funding mechanism”, Mercer again. This failure surfaces at the worst trigger of all.
A shareholder dies. The agreement obliges the survivors to buy the estate out, the life insurance was bought years ago against an old valuation, and the business has doubled since. The estate is owed, say, $1.5m; the policy pays $700,000; the survivors borrow the difference or renege on the widow. Current valuations and insurance reviewed against them would have cost a few hours a year.
Mercer’s framework asks a buy/sell agreement to define six elements:
Also set a review rhythm, with the valuation refreshed annually or on any material change, and the insurance checked against it.
His warning to owners who skip them is worth quoting in full: “If you don’t tell the business appraisers what you want for each of these elements, they will decide for you!”
None of this is exotic drafting. It mostly goes missing because, as Mercer observes, getting specific “makes people talk about things they don’t even want to think about”. His nudge to procrastinators: “If you think it is difficult to address these issues with your partner(s) in the here and now, just think how difficult it will be when one of you is in the hereafter.”
If you advise SME owners, your buy/sell agreements are worth an afternoon’s audit against the six elements above. The stale fixed price and the bare “fair value” clause are the two I see most in New Zealand agreements, and both are cheap to fix before a trigger.
An independent valuer slots into the drafting process at two points: setting the initial value, and being named (or made appointable) in the clause itself.
A buy/sell agreement trigger is priced as a fixed-fee internal transaction valuation, typically three to four weeks; fees are published on the pricing page before work starts. The thinking behind internal transaction pricing generally, standards of value included, is on: what is a fair price for an internal business sale?
How often should the valuation in a buy/sell agreement be updated?
Annually is the clean answer, and the discipline matters more than the anniversary. An 18-month-old valuation of a stable business is workable; a seven-year-old one is a dispute.
Can we name a formula instead of a valuer?
You can, and some agreements pair a formula with a valuation process as a cross-check, which is defensible. A formula alone, frozen at signing, is the failure mode described above. If you want certainty of method, specify the process and the standard of value; that gets you certainty without freezing the answer.
Who pays for the valuation when a trigger event occurs?
Whatever the agreement says: say it in the agreement. Half each or the company paying is the common default and hard to paint as unfair.
Does life insurance replace the need for a valuation?
Insurance answers the funding question, and only that one. The policy pays a number; the agreement still has to know whether that number matches the value of the shares. Insurance sized against a current valuation is the pairing that works.
Sources: Z.C. Mercer, Buy-Sell Agreements for Closely Held and Family Business Owners (2015); NZ IFRS 13 Fair Value Measurement; P. Christman on the five Ds, as cited at fealty.co.nz/exit-planning.
About the Author
Bruce McGechan, CVA — Fealty Business Valuations
Bruce McGechan is a Certified Valuation Analyst (CVA), credentialled by the National Association of Certified Valuators and Analysts (NACVA), and a Certified M&A Advisor. He has valued 90 privately held New Zealand businesses across many sectors. Based in Palmerston North and working nationwide, he prepares independent valuations for shareholder buyouts, succession and pre-sale planning, and relationship property and shareholder disputes. His work applies NACVA professional standards to New Zealand conditions — local transaction evidence, NZ tax settings, and the thin-market realities of owner-operated and mid-market companies.
Talk to Bruce: 021-245-8881