The Buy-Sell Agreement Is the Only Estate Plan Your Business Has. Most Minnesota Companies Do Not Have One.

Three people start a company. It works. Ten years later one of them dies, and his widow — who has never worked a day in the business and wants nothing to do with it — owns a third of it.

Nobody planned for this. There is no agreement requiring the company to buy her out, no money set aside to do it with, and no formula for what a third of a privately held Minnesota company is worth. What there is, now, is a co-owner with a lawyer and a legitimate grievance.

I have watched versions of this story end in litigation that cost more than the company’s best year, and every one of them was preventable. A buy-sell agreement is the document that answers all of those questions in advance. In my view it is the single most valuable governance document a closely held business can have — and most Minnesota companies either do not have one or have one that nobody has read since the day it was signed.

What the document actually is

A buy-sell agreement is a binding contract among the owners, and between the owners and the company, that determines what happens to an ownership interest when a triggering event occurs. It answers three questions before anyone is angry: what events trigger a purchase or a right to purchase; who buys — the company, the other owners, or both; and at what price, determined how.

The triggers are where incomplete agreements fail, because the dispute always walks in through the door nobody drafted for. A complete agreement addresses each of these:

When a client brings me an existing agreement, the first thing I do is run it against that list. The rows most often missing are divorce, disability, and termination of employment — and in a company where salary was the real return on ownership, the termination trigger is the one that decides the fight.

Every buy-sell dispute is a valuation dispute

Strip away the pleadings and that is what remains. The common pricing approaches:

Fixed price, updated periodically. Simple and transparent — and it fails, because nobody updates it. A stale fixed price is worse than no price at all, because it looks binding.

Formula. A multiple of EBITDA, revenue, or book value. Predictable and cheap. The risk is that a formula appropriate in 2016 produces an absurd number in 2026, and book-value formulas in particular can land far below any real-world valuation.

Appraisal. An independent valuation at the time of the trigger. Most accurate, most expensive, slowest — and itself a source of disputes over appraiser selection and methodology.

Hybrid. Formula as the default, with an appraisal right if a party objects. In my experience this is usually the practical answer.

Two drafting decisions get less attention than they deserve, and both of them show up in the case law.

First, discounts. Does the price apply a minority discount or a discount for lack of marketability? For a minority interest this is not a rounding difference. In Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285 (Minn. 2000), the competing appraisers proposed marketability discounts of 35% and 55%, and the Minnesota Supreme Court remanded with directions to apply “a marketability discount of between 35% and 55%.” 615 N.W.2d at 293. A twenty-point spread on a seven-figure interest is real money. Say so explicitly in the agreement; silence guarantees exactly that fight.

Second, different prices for different exits. A departure by death is not the same as a departure to start a competitor, and many well-drafted agreements price them differently. That structure is defensible when it is designed, and looks punitive when it is improvised.

Minnesota wrote this document into its corporation statute

Most corporate codes never mention buy-sell agreements. Minnesota names them.

Under Minn. Stat. § 302A.751, subd. 1(b)(3), a shareholder in a Minnesota corporation “that is not a publicly held corporation” may sue over conduct that is “unfairly prejudicial.” (That is broader than “closely held,” which under Minn. Stat. § 302A.011, subd. 6a, means 35 or fewer shareholders.) In deciding whether to grant relief, subdivision 3a says the court “shall take into consideration” the shareholders’ duty to one another and “the reasonable expectations of all shareholders as they exist at the inception and develop during the course” of the relationship.

Then the statute names this document specifically:

“For purposes of this section, any written agreements, including employment agreements and buy-sell agreements, between or among shareholders or between or among one or more shareholders and the corporation are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements.”

§ 302A.751, subd. 3a. Read that from the majority’s side. Without an agreement, a court reconstructs expectations from a decade of conduct — an open-ended, expensive, unpredictable inquiry. With one, the contract largely defines what the parties were entitled to expect. In short, the statute rewards the company that wrote things down.

Two limits apply, and they are different limits — I see them run together constantly, so keep them apart.

The presumption is scoped to what the agreement covers. “[C]oncerning matters dealt with in the agreements” is the operative clause, and subdivision 3a attaches no “unless unreasonable” condition to the presumption. A buy-sell buys you predictability on the subjects it addresses and nothing on the subjects it does not. The Court of Appeals has been explicit that “written agreements are not dispositive of shareholder expectations in all circumstances.” Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001).

The price you wrote is separately reviewable. That is subdivision 2, not subdivision 3a. In a court-ordered buy-out, where the shares are already subject to purchase under a shareholder control agreement or the terms of the shares, “the court shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case.” § 302A.751, subd. 2. A formula far below fair value therefore risks the one thing you actually wanted — the contract price. A buy-sell that is too aggressive protects nobody.

Low is not the same as unreasonable, though, and it is worth knowing how much weight a well-made agreement carries. In Gunderson the Court of Appeals upheld a buy-sell that priced a departing shareholder’s stock at $2,300 — against his own appraiser’s $1,133,000 — because the agreement was an arm’s-length transaction and he had proposed the very provision used to remove him. 628 N.W.2d at 186. Arm’s-length negotiation, before anyone knows which side they are on, is what makes a buy-sell hold.

Minnesota LLC members have a parallel remedy under Minn. Stat. § 322C.0701. I covered the corporate route here and the LLC route here.

An unfunded buy-sell is a theory

An agreement obligating the company to buy a deceased owner’s 40% interest for $2.4 million is worthless if the company does not have $2.4 million. Funding is the part that gets skipped, and it should not be:

• Life insurance is the standard funding mechanism for the death trigger, and it is cheap relative to the exposure. Entity-purchase (the company owns the policy and redeems the shares) and cross-purchase (the owners own policies on each other) structures have different tax and administrative consequences — choose deliberately, and read the note on Connelly below before you do.
• Disability buyout insurance exists and is routinely overlooked.
• Installment payment terms for unfunded triggers, with a promissory note, security, and a rate. Set the terms now, when nobody knows which side of them they will be on.
• A sinking fund, where the business generates the cash to support it.

Review the coverage against the current valuation on a schedule. Insurance purchased against a 2015 valuation does not fund a 2026 buyout.

The 2024 case every entity-purchase buy-sell should be measured against

If your agreement obligates the company to redeem a deceased owner’s shares and the company owns the life insurance that funds it, read Connelly v. United States, No. 23–146 (U.S. June 6, 2024), aff’g 70 F.4th 412 (8th Cir.). Two brothers owned a building supply corporation; the company held $3 million in life insurance to fund the redemption of the first brother’s shares. The Supreme Court, affirming the Eighth Circuit, held:

“We hold that Crown’s contractual obligation to redeem Michael’s shares did not diminish the value of those shares. . . . Because redemption obligations are not necessarily liabilities that reduce a corporation’s value for purposes of the federal estate tax, we affirm the judgment of the Court of Appeals.”

The Court’s reasoning started from a point the parties did not dispute — that “life-insurance proceeds payable to a corporation are an asset that increases the corporation’s fair market value” — and rejected the argument that the redemption obligation offsets those proceeds.

The practical consequence for an entity-purchase structure: the insurance proceeds may be counted in valuing the company for federal estate-tax purposes without an offsetting reduction for the redemption obligation, so the deceased owner’s estate can be taxed on a larger number than the family — or the agreement — anticipated. The Court was careful to add in a footnote: “We do not hold that a redemption obligation can never decrease a corporation’s value.”

If your agreement was drafted before June 2024 on the assumption that the obligation offsets the proceeds, that assumption needs to be re-examined with your tax advisor, and the entity-purchase versus cross-purchase decision deserves a fresh look. This is a federal tax question that turns entirely on the structure and the numbers. Nothing here is tax advice.

The nine ways existing agreements fail

When I review a buy-sell that has been sitting in a drawer, the defects cluster:

1. It was signed and never revisited. The business is five times larger; the formula is not.
2. A fixed price nobody updated.
3. No funding, making the obligation theoretical.
4. Triggers missing — commonly divorce, disability, and termination of employment.
5. The discount question left silent.
6. No deadlock mechanism, so a 50/50 company has no exit but litigation.
7. Inconsistent documents. The buy-sell says one thing, the operating agreement or bylaws say another.
8. No spousal signature. Minnesota does not require a non-owner spouse to consent to a buy-sell agreement, and this one is drafting practice rather than law — but many carefully drafted agreements obtain a spousal consent or acknowledgment anyway, so that a spouse who may later assert a marital interest in the business has already agreed to the transfer restrictions and the price mechanism. Ask whether yours should.
9. Never coordinated with the owners’ estate plans. The business is the largest asset in most of these estates, and the two documents have to agree.

Do it while everyone still likes each other

People resist buy-sell agreements because negotiating one means discussing death, divorce, and falling out with your partners at the exact moment the business is going well. That resistance has it backwards. This is the only moment the agreement can be fair — at every other moment, someone already knows which side of it they are on.

So: if you do not have one, this is the highest-value governance work available to a closely held Minnesota business, and it is dramatically cheaper than the dispute it prevents. If you have one, read it — confirm the valuation mechanism still produces a sane number, the funding still matches the value, the triggers cover what has changed in your ownership group, and the documents are internally consistent, then put the review on a two-year cycle. And if a trigger has already occurred, the agreement is the starting point, not necessarily the end: whether a formula is unreasonable, whether the trigger occurred, and how the price is computed are all litigable, and a negotiated resolution informed by an early, honest read of the document beats a valuation trial almost every time.

Madgett Law, LLC drafts and reviews buy-sell agreements for Minnesota closely held businesses, coordinates them with owners’ estate plans and funding, and represents owners when a trigger produces a dispute. Send us a message or call 612-470-6529.

Sources: Minn. Stat. § 302A.751 (judicial intervention; subd. 1(b)(3) unfairly prejudicial conduct in a corporation that is not a publicly held corporation; subd. 2 buy-out at fair value, and existing agreements controlling unless the court determines the price or terms unreasonable under all the circumstances; subd. 3a reasonable expectations of shareholders in closely held corporations, and the presumption that written agreements — including employment agreements and buy-sell agreements — reflect the parties’ reasonable expectations concerning matters dealt with in the agreements); Minn. Stat. § 302A.011, subd. 6a (definition of “closely held corporation”); Minn. Stat. § 322C.0701 (parallel LLC remedy) (all via the Minnesota Office of the Revisor of Statutes); Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001); Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285, 293 (Minn. 2000); Connelly v. United States, No. 23–146 (U.S. June 6, 2024), aff’g 70 F.4th 412 (8th Cir.) (slip opinion via supremecourt.gov). This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Insurance and tax consequences of buy-sell funding structures require individualized analysis with your tax advisor. No outcome is promised or implied.