Most business divorces start the same way. Two partners who trusted each other built something worth money, and then one of them died, got sick, got divorced, or simply wanted out, and nobody had written down what happens next. The litigation that follows often costs more than the disputed interest is worth. Braslow Legal handles both sides of this, and the difference between resolving an ownership change in sixty days and spending three years in court usually comes down to a document signed while everyone still got along.
What is a buy-sell agreement and what does it do?
A buy-sell agreement is a contract among the owners of a closely held business that sets out who can buy an ownership interest, when a sale is required or permitted, and how the price is determined. It functions as a prearranged exit ramp so that ownership changes follow a formula instead of a negotiation between people who may no longer be speaking.
It can live inside an operating agreement or shareholders’ agreement or stand alone. What matters is that it binds every owner and covers transfers that are voluntary, involuntary, and unplanned. A document addressing only a voluntary sale leaves the harder scenarios to state default rules.
Which events should trigger a buyout?
Death and voluntary departure are the obvious ones, and the agreements that fail in practice are usually the ones that stop there.
- Disability, defined by something measurable such as inability to perform material duties for 180 consecutive days
- Divorce, so a former spouse awarded an interest in equitable distribution does not become your partner
- Personal bankruptcy or a creditor charging order against an owner’s interest
- Loss of a professional license, which matters for medical, engineering, and accounting practices
- Termination for cause, with cause defined rather than left to argument
- Deadlock between owners holding equal stakes
A deadlock provision sometimes called a shotgun clause lets one owner name a price per unit, with the other choosing to buy or sell at that number. It produces honest pricing because the person setting the price does not control which side of the trade they end up on. A cash-rich owner has the advantage, so weigh that before including it.
How should the purchase price be set?
Three approaches exist, and only two work. A fixed price stated in the document goes stale almost immediately. A formula such as a multiple of trailing three-year average EBITDA works if the multiple reflects your industry and the agreement defines the accounting conventions behind it. Independent appraisal by a valuation professional selected under a named process is the most defensible and the slowest.
Many agreements combine methods: the owners certify an agreed value annually, and an appraisal controls if the last certificate is more than eighteen months old. Address the details that generate fights later. State whether a minority interest gets discounted for lack of control and marketability, since the gap between a pro rata share and a discounted one commonly runs 20 to 40 percent. Specify who pays for the appraisal and how a tie between competing appraisers breaks.
For family-owned businesses, Internal Revenue Code § 2703 decides whether the IRS respects the agreed price for estate tax purposes. The arrangement must be a bona fide business arrangement, not a device to pass value to relatives for less than full consideration, and comparable to terms unrelated parties would accept.
How do owners actually fund the buyout?
Life insurance is the common answer for death, and the structure you choose has tax consequences that changed recently.
In a cross-purchase arrangement, each owner buys a policy on each of the others, so four owners need twelve policies. In an entity redemption, the company owns the policies and buys back the departing owner’s interest. Redemption is simpler to administer, but the Supreme Court’s June 2024 decision in Connelly v. United States held that insurance proceeds a corporation receives to fund a redemption increase the company’s value for estate tax purposes, and the redemption obligation does not offset that value. That reasoning raised the taxable value of the deceased owner’s shares well above what his estate actually received. Owners relying on entity-owned insurance should have the structure reviewed, with an insurance LLC or trusteed cross-purchase among the alternatives.
Disability, retirement, and departure are rarely insurable in full. Installment notes running five to seven years at a stated interest rate, secured by the transferred interest, handle these. Cap the annual payment as a percentage of cash flow so the buyout does not strangle the business.
What happens if there is no agreement?
State default law decides, and it rarely produces what either owner wanted. A deceased owner’s interest passes through their estate to heirs who may have no role in the business and no obligation to sell. A minority owner who feels squeezed out can petition for relief under shareholder oppression or judicial dissolution statutes in both New Jersey and Florida, which puts a judge in charge of valuing and unwinding your company. Competing expert appraisals alone often run into five figures per side before anyone reaches the merits.
What does Braslow Legal look for in an existing buy-sell?
Whether the valuation mechanism has ever been used, whether the funding still matches the company’s current value, and whether the triggering events reflect the owners as they are today.
Companies grow past their agreements. A formula that produced a fair number when revenue was two million produces a windfall or a shortfall at ten million. Insurance bought to cover a twenty percent stake no longer covers it. Review the document every two or three years and after any material change in ownership, value, or entity structure, and confirm it coordinates with each owner’s personal estate plan.
A buy-sell agreement costs little relative to what it prevents, and it is only negotiable while the owners are still aligned. If your company operates without one, or with one nobody has opened since the formation binder was assembled, Braslow Legal can assess what your current documents would do in a real departure and draft what is missing. Reach out through the firm’s website.
