Family-owned or other closely held enterprises can use several approaches to structure buy-sell agreements, which can vary in structure and influence the transfer process and negotiations among parties.

For instance, buy-sell agreements can consist of redemption agreements that exist between the equity owner and the entity, in which the entity agrees to buy an offered equity interest upon the occurrence of a specified event. There are also cross-purchase agreements between or among equity owners, permitting equity owners to buy all or part of an offered equity interest upon the occurrence of a triggering event. In hybrid agreement structures, equity owners may offer their interest first to the entity, and then to the other equity owners, or sell part of their interest to the entity and part to the other owners.

Another important aspect of structuring a buy-sell agreement is designing a valuation methodology to establish the price for an equity interest. Fixed-priced methods tend to involve less ambiguity and less potential for dispute. Independent appraisals exist at the other end of the spectrum, reflecting current fair market value but potentially raising the prospects for disputes, differing opinions, or tension between equity holders.

For purposes of estate planning, a buy-sell agreement should set a price (or determine the mechanism to determine a price) for an equity interest. Timing and appraisal are key considerations: The failure to fix the value of shares that are sold under a buy-sell agreement can cause the stock to be included in the estate at a higher value than the value at which it is deducted.

Several IRS requirements must be met for buy-sell agreements to set estate tax values. For instance, the agreement must establish a reasonable and ascertainable price to be paid for the business interest - requiring an independent appraisal, market approach, or a formula based on objectively determinable economic or industry factors.

The buy-sell agreement should also be legally enforceable and adopted for a valid business purpose—not merely a device to shift the property to members of the decedent's family for less than full and adequate consideration. There's also a comparability test. In other words, the buy-sell option should be one that could have been obtained in a fair bargaining process among unrelated parties.

For companies that don't have a buy-sell agreement in place, one place to start is discussing how options like price, payment, and dispute resolution align with the equity owners' objectives. After all, it's important to have shareholder alignment on what would happen to the ownership interest when an equity owner passes away, gets divorced, retires, or becomes disabled.