Problem 1 — The Purchase Price Is Fixed and Already Wrong
Most buy-sell agreements set a fixed purchase price when the agreement is signed. At signing, that price might be accurate. A year later, it may not be. Three years later, it probably is not.
A fixed price that is too low harms the selling owner or their estate. A fixed price that is too high harms the buying owner or the company. Neither outcome is intentional, but both are common — because the business grew or shrank after the agreement was signed and no one updated the number.
The fix is a valuation formula that updates automatically or a requirement that owners confirm the price annually in writing. If no price is set in a given year, the agreement should fall back to a defined appraisal process. Most off-the-shelf agreements include neither requirement.
Problem 2 — The Valuation Method Is Vague or Missing
Even without a fixed price, the valuation method in your agreement may produce unpredictable results. “Fair market value” is not a valuation method — it is a legal standard. Without a defined process for determining that value (a formula, an appraisal trigger, a named methodology), the parties must negotiate or litigate the number at the worst possible moment.
A second gap that most agreements miss: they fail to specify whether minority-interest discounts apply. When a partial ownership stake is valued, appraisers commonly apply a lack-of-marketability discount and a lack-of-control discount. These can reduce the buyout value by 20 to 35 percent. Whether those discounts apply should be decided in the agreement — not after a triggering event when one side has every reason to fight over the number.
For a full overview of the succession planning tools that work alongside a buy-sell agreement, see best estate planning for Georgia business owners.
Problem 3 — Triggering Events Are Incomplete
A buy-sell agreement only functions when a triggering event is named in it. Death is almost always covered. Disability, divorce, bankruptcy, retirement, and involuntary termination are frequently missing.
Disability is the most common omission — and statistically the most likely trigger. A business owner under age 65 is more likely to become disabled than to die. Without a disability trigger, the business is left with an owner who cannot work but still holds full economic rights and is entitled to distributions.
Divorce is especially consequential for Georgia LLCs. Georgia is an equitable distribution state. A divorcing owner’s business interest can be treated as a marital asset, and without a specific divorce trigger in the agreement, the owner’s ex-spouse may end up as a partial co-owner.
Bankruptcy is also commonly missing. Under O.C.G.A. § 14-11-601, LLC membership interests can be transferred to a bankruptcy trustee unless the operating agreement and buy-sell agreement explicitly restrict the transfer. Without a bankruptcy trigger, a creditor could end up owning part of your business.
Problem 4 — No Right of First Refusal
A right of first refusal gives remaining owners the right to purchase a departing owner’s interest before it can be sold to anyone else. Without it, a departing owner — or their estate — can bring in any outside buyer.
That means your business partner’s widow, adult children, or estate administrator can transfer ownership to a third party with no business experience, no operational role, and full economic rights. You cannot be forced out, but you may find yourself running a business with a passive co-owner who expects regular distributions and contributes nothing.
Many buy-sell agreements include a transfer restriction but fail to pair it with a right of first refusal. The restriction prevents an unauthorized transfer — but without the right of first refusal, the remaining owner has no mechanism to buy the interest out. The result is a deadlock rather than a clean transition.
Problem 5 — Business Assets Held Outside the Entity Are Not Covered
Georgia business owners commonly hold real estate — the building, a warehouse, equipment — in a separate LLC from the operating company. This is standard asset protection practice. It is also a gap that most buy-sell agreements miss entirely.
If your buy-sell agreement covers only the operating entity, the real estate LLC is excluded. A triggering event could leave the surviving owner controlling the business but unable to control the property the business depends on. The real estate ends up in the deceased owner’s estate, subject to 18 to 30 months of complex probate, and potentially distributed to heirs who have no reason to cooperate on lease terms.
The fix is to include the real estate entity in the buy-sell agreement or create a separate agreement for it. Ignoring it creates an asset protection structure that works during normal operations but fails at the one moment it matters most.
Problem 6 — The Agreement Does Not Address S-Corp Restrictions
Georgia S-Corps have shareholder eligibility rules that buy-sell agreements frequently fail to address. An S-Corp cannot have more than 100 shareholders, and only certain individuals and specific types of trusts qualify as eligible shareholders. Transferring shares to an ineligible holder — even briefly during an estate settlement — can terminate the S-election.
Once the S-election is terminated, the company converts to a C-Corp. All future distributions become subject to double taxation: once at the corporate level and again when paid to shareholders. This is permanent unless the business re-qualifies and waits five years to re-elect.
If your buy-sell agreement allows shares to pass to a trust that is not a Qualified Subchapter S Trust (QSST) or an Electing Small Business Trust (ESBT), that transfer can end your S-Corp status. Generic templates are never written with S-Corp eligibility in mind. See 6 LLC operating agreement succession problems for related drafting gaps that arise when the operating agreement and buy-sell agreement are not coordinated.
Problem 7 — The Wrong Party Owns the Life Insurance
If your buy-sell agreement is funded with life insurance, who owns the policy matters as much as the policy itself. After the June 2024 Supreme Court ruling in Connelly v. United States, entity-owned life insurance proceeds increase the company’s fair market value for estate tax purposes — and the redemption obligation does not offset that increase.
The result: an entity-redemption buy-sell agreement funded with life insurance can produce a larger estate tax bill for the deceased owner’s estate than the same buyout structured as a cross-purchase with individually owned policies. This was not the case before June 2024. Any entity-redemption agreement drafted or reviewed before that date may need to be restructured.
For a full breakdown of how funding structure affects the tax outcome, see funded vs. unfunded buy-sell agreements in Georgia.
Problem 8 — The Agreement Has Never Been Updated
A buy-sell agreement drafted when the business had two owners, no debt, and a $500,000 valuation does not automatically adapt when it grows to four owners, carries a $2 million SBA loan, and is worth $4 million.
The longer an agreement goes without review, the harder renegotiation becomes. Owner interests diverge over time. A 60/40 split that seemed fair at formation looks different after one partner contributed significantly more capital or took on more operational responsibility.
Most practitioners recommend reviewing a buy-sell agreement every 3 to 5 years or after any significant event: a new owner joining, a major capital contribution, a new loan, or a material change in business value. Any entity-redemption structure should also be reviewed after the Connelly ruling. At The Hive Law, buy-sell agreement review and drafting costs $1,500 to $3,000 as a flat fee. See how much business succession planning costs in Georgia for the full succession package pricing.
1
Book a Strategy Call
Schedule a free call to discuss your current agreement, your ownership structure, and which of these problems apply to your business.
2
Review Your Existing Agreement
Melissa Breyer reviews your agreement against all eight problems — valuation method, triggering events, funding structure, asset coverage, entity restrictions, and update history.
3
Draft the Amendments
Targeted amendments address the specific gaps. The review identifies exactly what needs to change before a triggering event forces the issue.
For a broader look at how these buy-sell agreement failures fit into the larger picture of succession planning gaps, see Problems With Business Succession Plans in Georgia.
