Fixed price buy-sell agreements do exactly what their name suggests. They fix a price today for transactions that will occur at future dates. Fixed price buy-sell agreements are often found in smaller corporations, partnerships and LLCs. The advantages to fixed price buy-sell agreements are they are easy to understand, easy to negotiate, and typically inexpensive. However, there are real disadvantages to fixed price buy-sell agreements.

The primary disadvantage of fixed price buy-sell agreements is that they are out of date shortly after they are inked. While the parties almost always intend to update the price, they seldom do. It is often easy for the parties to agree on the initial price for a fixed price buy-sell agreement; however, it can become increasingly difficult and confrontational to discuss price at later dates. Such discussions force shareholders to consider their potential disabilities, firings, retirements, and even deaths. Further, the range of shareholder characteristics tends to widen with the passage of time. Most business owners, at least in our experience, will go to extremes to avoid confrontational discussions. If there is a controlling shareholder and the remaining shareholders hold minority interests, it can become awkward to discuss business valuation for purposes of a buy-sell agreement. Minority shareholders are often thinking in terms of the value of the enterprise as a whole, and not in terms of illiquid, minority interests in the corporation. The controlling shareholder may consider minority shares to be worth proportionately less than his shares. We have seen fixed price buy-sell agreements where the “out-of-date” problem is cured by calling for a business valuation in the event that an agreed-upon price is more than, say, one year old. This cure, however, just opens up the potential problems associated with process buy-sell agreements.

At times, fixed price buy-sell agreements become examples of potentially expensive bets on the part of shareholders. If the price is fixed and they know that price is substantially below the current value of the business, owners who do not update the value are making implicit or explicit bets that a trigger event will happen to the other shareholder(s) before it happens to them. In other words, there is bet that the other guy(s) will die first. And one of them is correct!

In our opinion, fixed price buy-sell agreements should be avoided like a contagious disease in most situations. However, if you have one, you must have the discipline to update the price periodically.