Buy-sell agreements: the prenup your business actually needs.
A buy-sell agreement is the contract among co-owners that decides, in advance, what happens to an ownership stake when an owner dies, becomes disabled, divorces, departs, or deadlocks with the others. Sign it while everyone is friends and it is paperwork. Wait until a trigger fires and it is the most expensive document you never drafted.
What it does, and when it fires
Three jobs. It restricts transfers, so no owner can hand their stake to a stranger, an heir, or an ex-spouse without the others’ consent. It guarantees liquidity, so a departing owner (or their family) has a buyer and the remaining owners have a way to keep control. And it sets the price in advance, or at least the method, so the number gets decided while everyone is calm.
The trigger events worth drafting for run to six: death, the classic case; disability, harder to define and more likely to happen during working years; divorce, which matters doubly in Texas, below; departure, voluntary or otherwise, and the terms should differ; deadlock, the 50/50 stalemate that can otherwise strangle a company; and default, an owner’s personal bankruptcy or creditor trouble reaching the company’s equity. An agreement that only handles death has covered the least likely trigger and skipped the rest.
Cross-purchase, redemption, and what Connelly changed
Two basic architectures. In a cross-purchase, the surviving owners buy the departing owner’s interest directly. In a redemption (entity-purchase), the company itself buys the interest back. Hybrids let the parties wait and choose when the trigger fires. For decades the choice ran on convenience and basis mechanics: redemptions are simpler with many owners, cross-purchases give survivors a stepped-up basis.
Then the Supreme Court decided Connelly v. United States, unanimously, in June 2024. The holding: a company’s obligation to redeem a deceased owner’s shares does not reduce the company’s value for federal estate tax purposes, so the life insurance the company collects to fund the redemption counts toward the company’s value. In Connelly itself, $3 million of corporate-owned insurance turned a $3.86 million company into a $6.86 million one, and the deceased owner’s estate paid tax on shares valued accordingly. The insurance meant to fund the buyout inflated the estate it was funding.
The consequence is not that redemptions are dead; most owners are nowhere near the federal estate exemption. It is that every insurance-funded redemption drafted before mid-2024 deserves a fresh read, and that cross-purchase and trusteed structures, where the policies sit outside the company, are back in favor for owners with estates worth planning around. This is exactly the kind of quiet law change that a document signed years ago never hears about.
The valuation clause is where these agreements fail
Not at signing, at trigger time. The three standard methods each fail a different way. A fixed price ("certificate of value") is precise and current for exactly one year, then quietly ages; buyouts have closed at decade-old numbers because nobody updated the certificate. A formula, a multiple of earnings or book value, is mechanical and cheap but drifts as the business changes shape. An appraisal process prices the real company on the real date but costs money and takes time, exactly when the parties are least inclined to cooperate.
The drafting answer is usually a sequence: current certificate if the owners kept it current, appraisal as the fallback, with the appraiser-selection mechanics spelled out in advance. The deeper answer is a habit: owners who know what the business is worth on a yearly rhythm never face a stale number, and the difference between an indication of value and a certified appraisal, and when each is enough, is worth understanding before the clause gets written.
The Texas angles
Community property doubles the divorce trigger. Texas is a community property state, which means an ownership interest acquired during marriage is generally community property, and an owner’s divorce can put a stake, or a claim against it, in front of a spouse the other owners never chose. A Texas buy-sell should treat divorce as a first-class trigger, and spousal joinder, the spouse signing onto the agreement’s terms, is standard practice for a reason.
Put the mechanics where the entity lives. For Texas LLCs, the company agreement is the natural home for transfer restrictions and buyout terms; for corporations, a standalone agreement with conspicuous transfer restrictions on the certificates. Either way, the documents have to agree with each other, and a classic diligence finding is a company agreement and a standalone buy-sell that quietly contradict each other.
A response deadline is a real deadline. In Crain v. Northern, 2026 Tex. Bus. 4, the Texas Business Court ordered specific performance under a mandatory buy-sell clause after the offeree failed to respond inside the thirty-day window, which the agreement deemed a conclusive forfeiture of his membership interest. Six weeks later the same court held that losing membership had stripped him of standing to pursue his derivative claims. One missed notice period ended both the ownership and the lawsuit. Response mechanics deserve the same drafting attention as the price.
What happens without one
The disputes have a literature of their own on this site, because they are a practice area: the partner who wants out with no exit mechanism (your business partner wants out), and the full taxonomy of owner breakups, from freeze-outs to forced dissolutions (business divorces in Texas). Nearly every case in those pages shares one fact: no working buy-sell agreement. When the fight is already on, the option map is in shareholder disputes in Texas. The document is cheap. Its absence is not.
One call, before the trigger
I draft buy-sell agreements for Texas companies, and the annual valuation habit that keeps them current is built into how I work, including the business value estimate that gives owners a defensible number without an appraisal-sized bill. Insurance funding is coordinated with your advisor; estate-tax structuring after Connelly is coordinated with your tax counsel, with Scale LLP colleagues where the planning gets deep. One relationship, one number: (682) 529-7177. Or start with How can I help?
Common questions
Cross-purchase, where the remaining owners buy the departing owner's interest directly; entity-purchase or redemption, where the company itself buys it back; hybrid or wait-and-see, which lets the parties choose between those two when the trigger actually fires; and one-way agreements, used when a single key person or outside buyer stands ready to purchase. Which structure fits depends on the number of owners, the tax picture, and, since 2024, the Connelly decision's effect on insurance-funded redemptions.
The real ones: a stale valuation clause can force a sale at a price nobody would agree to today; insurance funding costs real premium dollars every year for an event that may never happen; a redemption structure can now inflate a deceased owner's estate-tax value after Connelly; and a badly drafted agreement can trap an owner who wants out, or hand a departing owner leverage the others never intended. Every one of those is a drafting problem, not an argument against having an agreement. The alternative to a buy-sell agreement is not freedom, it is litigation.
No, but the buyout has to be funded somehow, and insurance is usually the cheapest way to fund a death buyout, because it delivers exactly when the obligation lands. The alternatives, company cash, installment notes over years, outside borrowing, all put the payment risk on the survivors at the worst possible moment. Lifetime exits, retirement, departure, disability, are more often funded with installment notes, sometimes backed by disability buyout coverage. The structure question and the funding question have to be answered together, especially after Connelly.
In June 2024 a unanimous Supreme Court held that a corporation's obligation to redeem a deceased owner's shares does not reduce the company's value for estate tax purposes, so life insurance proceeds the company receives to fund that redemption count toward the company's value. In Connelly itself, $3 million of insurance turned a $3.86 million company into a $6.86 million one for estate tax. The practical consequence: redemption agreements funded with corporate-owned insurance can inflate the very estate they were meant to pay out, and many should be restructured, often toward cross-purchase or trusteed arrangements. If your agreement predates 2024 and the company owns the policies, it is due for a read.
Yes, and most well-run Texas LLCs put the buy-sell mechanics directly into the company agreement rather than a separate document: transfer restrictions, trigger events, valuation method, and payment terms all live naturally there. Separate buy-sell agreements still make sense when insurance funding and multiple entities are involved. What matters is not the container but the coverage, and that the company agreement and any standalone buy-sell say the same thing.
The honest answer: whatever method the owners will actually keep current. A fixed price with an annual update is simple and fails silently the year everyone forgets to update it. A formula is cheap and mechanical but drifts from reality as the business changes. An appraisal process costs more at trigger time but prices the actual company on the actual date. Many well-drafted agreements combine them: a certificate of value if current, appraisal as the fallback. The one unforgivable clause is the one nobody has looked at since signing.
Every co-owned business ends someday. The agreement decides whether it ends on purpose.
The words you'll hear
If this goes further, these are the terms that will come up, from us or from the other side. Each one links to a fuller explanation.
- Buy-Sell Agreement
- A contract among owners of a closely-held business establishing terms for transfer of ownership interests upon specified triggering events, death, disability, retirement, termination of employment, divorce....
- Company Agreement
- The principal governance document of a Texas LLC, the contract among members (and managers, if applicable) that establishes the LLC's internal rules.
- Specific Performance
- Specific performance is a court order compelling a party to do what it promised rather than pay for not doing it.
- Business Divorce
- The negotiated, mediated, or litigated separation of co-owners of a closely-held Texas business, covering contractual, statutory, fiduciary, and judicial mechanisms by which co-owners exit a relationship....
- Right of First Refusal (ROFR)
- A contractual right giving the holder the option to purchase property or interests at the same terms offered by a third party, before the seller can....
- Earnout
- A deferred component of M&A purchase price, payable to the seller after closing only if the target business achieves specified financial or operational milestones during a....
- Membership Interest
- The ownership interest of a member in a Texas LLC, comprised of two analytically separate components: economic rights (rights to distributions and allocations) and governance rights....