9026 / How does the existence of a buy-sell agreement impact small business valuation?

As discussed in Q 8992 to Q 9007, a buy-sell agreement can function as an important business succession planning tool, as it allows the business owners to plan for the orderly withdrawal of one or more business owners and will specify a predetermined method for determining the price of the business interests. Despite this, IRC Section 2703 provides that the value of any interest must be determined without regard to any option, agreement, or other right to acquire or use the property at a price less than the fair market value of the property (without regard to the option, agreement, or other restrictions) or any restriction on the right to sell or use the property (i.e., buy-sell agreement), unless the agreement meets the following requirements:

(1)  It is a bona fide business arrangement;

(2)  It is not a device to transfer the property to members of the decedent’s family for less than full or adequate consideration; and

(3)  It has terms comparable to those entered into by persons in an arm’s length transaction.¹