Shareholders in a closely held family business can utilize a variety of estate planning strategies in order to assure continued ownership of the business by members of the family. The most common strategy is a buy-sell agreement, under which all the stockholders agree that, upon the death of one of them, or upon the decision by one of them to sell his or her shares, the remaining stockholders will have the right to purchase the shares from the decedent's estate or from the selling shareholder. The purchase need not be obligatory, and thus any remaining shareholder would be free to opt out. Those stockholders who elect to participate in the buyout acquire the deceased or selling stockholder's shares pro rata, based upon their respective holdings.

Alternatively, an agreement may be structured whereby the corporation itself, rather than the remaining shareholders, has the right (or perhaps the obligation) to purchase the shares of the deceased or selling shareholder. Many jurisdictions, seeking to protect creditors, place restrictions on the power of corporations to purchase their own shares. For example, reacquisition of its own shares by a corporation may be subject to a statutory requirement that the corporation's purchase of its own stock can be made only to the extent of accumulated surplus, or that after the purchase the corporation must be solvent.

A hybrid of these approaches is possible as well. The shareholders' agreement may provide that the corporation can buy its own shares to the extent of its accumulated surplus (or to the extent permitted under other statutory constraints), and any unpurchased shares would then be subject to a purchase option in favor of the remaining shareholders.

Whether shares of a family corporation's stock are to be purchased by the corporation or by the remaining stockholders, it is possible that neither will have sufficient, readily available funds to make the purchase. The problem of funding the purchase of deceased shareholders' stock may be addressed by purchasing life insurance policies on the lives of shareholders. This is particularly important in the case of older and/or controlling shareholders.

Whatever approach is taken, a critical issue is valuation: At what price are the deceased or selling stockholder's shares to be bought? Market value would be a legitimate valuation, but it is often difficult to calculate. Family businesses are, by definition, closely held, with little or no liquidity in their stock. Thus, market value may be difficult or impossible to determine accurately.

Book value has the advantages of relative ease of determination and apparent objectivity. However, care must be taken in situations where book value may differ significantly from actual economic value. This is true of companies with substantially appreciated assets that are carried on their books at acquisition cost. A court may refuse to enforce a transfer restriction providing for a buyout at book value when the evidence shows that the shareholder had received an offer to purchase the shares for much more than their book value.

Additionally, situations may arise where the business's accounting methodology is questionable. Under a buy-sell agreement, an understated book value may cause a substantial hardship upon the estate of a deceased shareholder, while an overstated book value may unfairly hinder the efforts of the remaining shareholders to keep the business within the family.