Most buy-sell disputes are valuation-clause disputes.

A buy-sell agreement valuation clause sets the price for a departing owner's interest on a trigger event — death, TPD, exit or deadlock. The three mechanisms are a fixed price, a formula, or independent valuation at market value (IVS 104). Fixed prices go stale, formulas break as the business changes, and 'agreed valuer' clauses fail once parties disagree. Prismi's guide covers the fallback to draft before a dispute forces it.

Why the valuation clause is the clause that matters

A buy-sell agreement is only as good as the mechanism that sets the price. Owners and their lawyers often spend most of the drafting effort on the trigger events and the transfer mechanics — who must sell, who must buy, what happens to security and guarantees — and comparatively little on how the price is actually determined. That is backwards. Most disputes that reach a lawyer's desk over a buy-sell agreement are not disputes about whether a sale must happen; the trigger event has already made that clear. They are disputes about what the price is. A clause that reads well at signing but has no workable mechanism once the relationship between the parties has soured, or once the business looks nothing like it did at signing, is a clause that will be litigated rather than relied upon. This is a drafting problem, not a valuation problem — the fix happens years before the trigger event, at the point the agreement is drafted or reviewed. Agreements are also often drafted with a single pricing mechanism applied uniformly to every trigger event — death, TPD, voluntary exit, deadlock — on the assumption that a fair price is a fair price regardless of why the exit is happening. That assumption does not hold up. Death and TPD triggers are typically funded by insurance, and the pricing mechanism needs to produce a figure aligned with the cover in place or reconciled against it — see below. A voluntary exit can reasonably carry a different mechanism, sometimes with a discount for lack of marketability or a deferred payment structure, because the business is not disrupted by the same shock. A deadlock trigger is the hardest case: the relationship has typically broken down by the time the mechanism is invoked, which is exactly when an 'agreed valuer' clause with no fallback is least likely to work. A well-drafted agreement asks, for each trigger event separately, whether the same mechanism still produces a fair and workable result.

The three pricing mechanisms, and how each fails

Buy-sell agreements price the exiting interest one of three ways. Each is a legitimate drafting choice; each has a predictable failure mode that shows up years after signing, usually at the worst possible time.

• ·Fixed or agreed price: the parties nominate a dollar figure (or a per-share figure) at signing, sometimes reviewed annually. Failure mode: the figure goes stale. Businesses grow, shrink, take on debt or change composition, and a price fixed at signing (or last reviewed three years ago) bears no relationship to current value. Without a binding review cadence, the fixed price becomes either a windfall or a shortfall depending on which way the business has moved — and the party disadvantaged by the stale figure has every incentive to contest it.
• ·Formula: the price is calculated by a stated formula, commonly a multiple of EBITDA, a multiple of revenue, or net asset backing plus a goodwill component. Failure mode: the formula breaks when the business no longer fits the assumptions it was built on. A revenue multiple written for a steady-state trading business does not cope with a year of exceptional growth or a COVID-style disruption. An EBITDA multiple says nothing about how EBITDA is normalised — add-backs, owner remuneration, one-off items — and the parties can genuinely disagree on what the formula's own inputs are, which defeats the point of having a formula at all.
• ·Independent valuation: on a trigger event, an independent valuer is appointed to determine market value as at the trigger date, applying a stated methodology or valuer discretion within stated parameters. Failure mode: the clause assumes the parties can agree on a valuer, a methodology, or both, at the exact moment they are least likely to agree on anything — after a death, a deadlock, or a forced exit. An 'agreed valuer' clause with no fallback appointing mechanism is not a mechanism; it is an invitation to stalemate.

Independent valuation clauses: what the drafting needs to nail down

Where the mechanism is (or defaults to) an independent valuation, the clause needs to answer several questions in advance, not leave them to be negotiated after the trigger event. Appointing body: name a specific, currently operational fallback process for appointing the valuer if the parties cannot agree — commonly a nomination from the Resolution Institute, or an equivalent nominating body confirmed to be active at drafting. Older template clauses that rely on a 'President Nomination' from Chartered Accountants Australia and New Zealand should be flagged and updated: CA ANZ ceased that service in 2015, and a clause built on it may now be unenforceable — precisely the stale-mechanism risk this section is warning against. A clause that says only 'the parties will agree on a valuer' without a checked, working fallback has no mechanism at all once agreement is the very thing that has failed. Expert, not arbitrator: the clause should state expressly that the valuer acts as an expert, not an arbitrator, and that the determination is final and binding in the absence of manifest error or fraud. This distinction affects whether the valuer's determination can be challenged, and under what grounds — expert determinations are harder to appeal than arbitral awards are to enforce cleanly, but the drafting needs to say so, not leave it to be inferred. Cost allocation: state up front whether the cost of the valuation is borne equally, by the party triggering the exit, or by the entity — an unallocated cost becomes its own dispute layered on top of the pricing dispute. Instructions and methodology: specify the standard of value (market value — the willing-but-not-anxious basis in IVS 104, consistent with the ATO's market valuation guidance — is the conventional default for a trigger event with CGT consequences), the valuation date (usually the trigger date, not the date the valuer is engaged, which can be materially later), and whether the valuer has discretion over methodology or is directed to a specific approach. Leaving methodology entirely to valuer discretion is not wrong, but the parties should understand that is the choice being made.

Insurance funding alignment: the gap nobody notices until a claim

Many buy-sell agreements are funded by life and TPD insurance held on each principal, structured so the sum insured pays the surviving or continuing owners, who use the proceeds to buy the departing owner's (or their estate's) interest. The problem is that the sum insured and the valuation clause's output are two entirely separate numbers, set by two entirely separate processes, and nobody is required to keep them aligned. Cover is typically fixed at the policy's inception and reviewed (if at all) on its own schedule, often infrequently. The valuation clause, if it is a formula or independent valuation, produces a figure that moves with the business. Over time the two drift apart. If the business has grown and the price under the valuation clause exceeds the insurance proceeds, the continuing owners face a funding shortfall at exactly the moment — a co-owner's death or TPD — when raising additional capital is hardest. If the business has contracted and cover exceeds the valuation clause's output, the departing owner's estate may be arguing for the higher figure, undermining the point of having a valuation mechanism at all. A well-drafted agreement addresses this directly: either the sum insured is reviewed on the same cadence as the valuation (see below), or the agreement states explicitly how a shortfall or surplus between insurance proceeds and the clause price is to be resolved — an instalment arrangement for a shortfall, for instance, rather than leaving it to be negotiated under pressure. There is a separate tax reason to keep the two aligned: because the transfer is typically between an estate and continuing owners who are not dealing at arm's length, s 116-30 of the ITAA 1997 can substitute market value for the actual proceeds, so a clause price the file cannot defend as market value carries CGT exposure on top of the funding gap.

Review cadence and stale-price provisions

A fixed or agreed price clause without a mandatory review cadence is a clause that is quietly becoming wrong from the day it is signed. Two drafting approaches are common. The first is a periodic re-valuation obligation — the agreement requires the parties to update the agreed price (commonly annually or biennially, sometimes tied to the accounts sign-off date) using either a light-touch valuation or a re-application of the agreed formula, with the updated figure schedule attached to the agreement as executed. The second is a deeming provision — if the parties fail to update the agreed price within a stated period, the agreement deems the fixed-price mechanism to have lapsed and falls back automatically to an independent valuation at the trigger date. The second approach is generally the more robust of the two, because it does not rely on the parties actually doing the annual paperwork; a fixed-price clause the parties forgot to update for six years is a common and entirely foreseeable source of dispute, and a deeming fallback removes the incentive to leave it stale deliberately when the current figure suits one party and not the other.

Deadlock and shotgun mechanisms as an alternative to a pricing clause

Where the trigger is a genuine deadlock rather than death, TPD or a voluntary exit, some agreements use a shotgun (or 'Russian roulette') clause instead of, or alongside, a valuation mechanism. One party names a price at which they will either buy the other out or sell to the other party at that price, and the counterparty chooses which side of the transaction to take. The mechanism is self-policing — because the offering party does not know which side they will end up on, they are incentivised to name a fair price — and it avoids the cost and delay of an independent valuation entirely. It works best between two roughly equal parties with roughly equal access to capital; it works poorly where one party could not realistically fund a buyout even at a fair price, because the mechanism then becomes a way for the better-capitalised party to force a sale at a low price the other side is forced to accept. Agreements sometimes combine the two: an independent valuation sets a reference price, and the shotgun mechanism operates around that reference to resolve who buys and who sells, rather than what the price is. Whether a shotgun clause is appropriate is a drafting and commercial decision for the parties' lawyers — it sits alongside, rather than replaces, the valuation-methodology questions addressed above.

Which valuation engagement fits a buy-sell matter

Where the agreement specifies an independent valuation — whether at drafting stage, for a scheduled review, or on an actual trigger event — the right engagement depends on where the matter sits. Comprehensive (from $3,995 + GST, 15–25 business days) suits a routine scheduled review or a straightforward single-entity trigger event where the parties are not in dispute and multiple methodologies with documented reasoning are sufficient. The Defensible Valuation File (from $8,995 + GST, 25–35 business days) is the appropriate tier where the trigger event is contested, where a deadlock has already produced friction between the parties, or where the outcome is likely to be tested by one side's lawyers — the deeper evidence trail and documented rejection of alternative methodologies matter more when a challenge is expected. Where the matter involves genuine complexity — multiple entities, a formula that needs to be tested against an independent methodology, or advisers on both sides who need to see how the position moves under different assumptions — the Valuation Range & Scenario Review (from $12,995 + GST, 30–45 business days) is built for that. Retrospective valuation dates, common where the trigger event occurred some time before the valuer is engaged, attract a $495 surcharge per historical date; matters involving more than one entity are $750 per additional entity; and urgent matters (a deceased estate under time pressure, for instance) can be accelerated at +30% of the base fee, subject to capacity. Every tier is reported to APES 225, with fees fixed at engagement and never contingent on the figure reached. Prismi prepares independent valuations only — we are not a registered tax agent and do not provide legal advice, and whether a particular clause or mechanism is appropriate for a given agreement is a question for the parties' lawyers.