Buy-Sell Agreement Considerations
Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: Owners, Shareholders, Key Executives
Purpose
Provide guidance on buy-sell agreements for construction company owners to protect the business and shareholders.
Disclaimer
This guide provides general information only. Buy-sell agreements are complex legal documents. Always consult qualified legal and tax advisors.
What is a Buy-Sell Agreement?
A contract among business owners that:
- Controls ownership transfers
- Sets purchase/sale terms
- Provides funding mechanism
- Protects remaining owners
- Creates liquidity for departing owners
Also Known As:
- Shareholder agreement
- Buyout agreement
- Stock restriction agreement
- Membership interest restriction (LLC)
Why Construction Companies Need Buy-Sell Agreements
Construction-Specific Reasons:
| Reason | Explanation |
|---|---|
| Bonding | Surety needs ownership clarity |
| Key person risk | Owner departure impacts operations |
| Client relationships | Continuity critical |
| Licenses | May be tied to individuals |
| Non-compete | Protect business value |
| Family succession | Plan transitions |
Trigger Events:
- Death of owner
- Disability
- Retirement
- Voluntary departure
- Termination for cause
- Divorce
- Bankruptcy
- Deadlock (50/50)
Types of Buy-Sell Agreements
1. Cross-Purchase Agreement
How It Works:
- Owners agree to buy each other's interests
- Each owner holds insurance on others
- Direct purchase between individuals
Pros:
- Stepped-up tax basis for buyer
- Simple with few owners
- No corporate involvement
Cons:
- Complex with many owners
- Multiple insurance policies
- Individual funding burden
2. Redemption (Entity Purchase)
How It Works:
- Company agrees to buy departing owner's interest
- Company holds insurance policies
- Company purchases interest
Pros:
- Simple administration
- Single insurance policy per owner
- Company funds purchase
Cons:
- No stepped-up basis
- Potential accumulated earnings tax
- Affects company cash
3. Hybrid (Wait and See)
How It Works:
- Gives option to either entity or remaining owners
- Flexibility at trigger event
- Decide based on circumstances
Pros:
- Maximum flexibility
- Adapt to tax law
- Optimize for situation
Cons:
- Complexity
- Potential disputes
Key Provisions
1. Triggering Events
| Event | Typical Treatment |
|---|---|
| Death | Mandatory buyout |
| Disability | Mandatory after period |
| Retirement | Right to sell |
| Voluntary resignation | Right or option |
| Termination for cause | Mandatory (discounted?) |
| Divorce | May trigger |
| Bankruptcy | May trigger |
2. Valuation
Methods:
- Fixed value (updated periodically)
- Formula-based
- Appraisal process
- Combination
Construction Valuation Factors:
- Revenue multiple
- EBITDA multiple
- Book value
- Backlog value
- Client relationships
- Key personnel
3. Purchase Price Payment
Options:
- Lump sum
- Installment payments
- Promissory note
- Earnout
- Insurance proceeds
- Combination
4. Funding Mechanisms
| Mechanism | Use Case |
|---|---|
| Life insurance | Death |
| Disability buyout insurance | Disability |
| Company cash | Planned events |
| Seller financing | Most events |
| Bank financing | Larger buyouts |
Valuation Approaches
Fixed Value Method:
Agreed Value: $_______________
To be reviewed/updated: ☐ Annually ☐ Semi-annually
If not updated within ___ months, use formula method.
Last Updated: ________________
Owner 1 Signature: ________________
Owner 2 Signature: ________________
Formula Method:
Example Formula:
Book Value (adjusted): $__________
+ Goodwill (X × Avg EBITDA): $__________
+ Backlog value (X%): $__________
- Adjustments: $__________
= Enterprise Value: $__________
Owner's % Interest: ______%
Owner's Interest Value: $__________
Appraisal Method:
- Triggering event occurs
- Each party selects appraiser
- If values within X%, average used
- If not, third appraiser decides
- Cost allocation defined
Insurance Funding
Life Insurance:
Term vs. Permanent:
- Term: Lower cost, temporary
- Permanent: Builds cash value, lasts
Amount:
- Cover ownership value
- Review annually
- Increase as value grows
Disability Buyout Insurance:
Key Features:
- Waiting period (typically 12-24 months)
- Lump sum or installments
- Definition of disability
- Benefit period
Cross-Purchase Insurance:
Owner A insures Owner B: $________
Owner B insures Owner A: $________
(With multiple owners, becomes complex)
Entity Purchase Insurance:
Company insures Owner A: $________
Company insures Owner B: $________
(Company is beneficiary)
Non-Compete Provisions
Typical Terms:
| Element | Range |
|---|---|
| Duration | 2-5 years |
| Geographic scope | Market area |
| Scope of restriction | Trade, customers, employees |
Enforceability:
- Must be reasonable
- State law varies
- Tied to consideration
- California limitations
Construction-Specific Considerations
Licensing:
- If license tied to owner
- Plan for license continuity
- Qualifier succession
Bonding:
- Personal indemnities
- Surety notification
- New owner approval
- Capacity impact
Key Client Relationships:
- Transition planning
- Non-solicitation
- Cooperation period
Employee Considerations:
- Key person retention
- Non-solicitation
- Management succession
Dispute Resolution
Common Provisions:
- Mediation first
- Binding arbitration
- Venue selection
- Cost allocation
Avoiding Disputes:
- Clear language
- Regular updates
- Good communication
- Professional advice
Review and Update
Review Annually:
- Valuation still appropriate?
- Insurance adequate?
- Ownership unchanged?
- Terms still suitable?
- Tax law changes?
Update When:
- Ownership changes
- Significant value change
- Tax law changes
- Life circumstances change
- Business circumstances change
Professional Advisors Needed
| Advisor | Role |
|---|---|
| Attorney | Draft/review agreement |
| CPA | Tax planning |
| Insurance agent | Funding solutions |
| Business appraiser | Valuation |
| Financial planner | Personal planning |
Related Documents
- Succession Planning
- Business Planning
- Key Person Risk
- Financial Planning
Template provided by support.construction. Buy-sell agreements protect owners and the business.