Owning a closely held business or professional practice means your company’s future is tied directly to the people who run it, and to the plans in place if one of them has to step away. When a partner dies, becomes disabled, divorces, or simply wants out, the question is not whether things will change, but whether that change will be orderly and fair.
The M Firm works with business owners across Texas to structure buy-sell agreements that turn “what if” moments into clearly defined, legally enforceable transitions. Thoughtful planning today can protect your company, your partners, and your family from confusion and conflict later.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract among a business’s owners that sets out what happens to an owner’s interest when certain “triggering” events occur. Common triggers include death, disability, retirement, divorce, bankruptcy, loss of a professional license, or simply an owner’s decision to exit.
The agreement answers three key questions in advance: who can buy the departing owner’s interest, how that interest will be valued, and how the purchase will be funded. In this way, it functions like a roadmap for ownership transitions, drafted while everyone is on good terms rather than in the middle of a crisis.
Why It Matters More Than You Think
Without a buy-sell agreement, an unexpected departure can send a business into conflict and uncertainty. Heirs may inherit an ownership stake but have different ideas about management, or they may want to cash out when the remaining owners are not prepared to buy them out.
A clearly written buy-sell agreement can help:
- Prevent disputes among remaining owners and family members by setting expectations before emotions run high.
- Preserve business continuity by minimizing disruption to operations, employees, customers, and lenders.
- Protect the company’s value by providing a mechanism for fair, timely valuation and payment.
- Demonstrate proactive planning to banks and investors to improve the business’s creditworthiness.
For many owners, their interest in the business is their largest asset. A buy-sell agreement helps ensure that asset can be converted to cash for their family on fair terms, instead of leaving loved ones with an illiquid interest and no clear exit.
Common Structures: How These Agreements Work
Most buy-sell agreements fall into a few familiar structures, which can be tailored to your company’s needs.
Cross-purchase agreement: The remaining owners agree to buy the departing owner’s interest directly. This can work well for smaller businesses with a limited number of owners and may allow the purchasing owners to increase their tax basis in the company.
Entity (redemption) agreement: The business itself buys back the departing owner’s interest. This simplifies the process when there are several owners, because the company is the buyer rather than each owner arranging their own purchase.
Hybrid or “wait-and-see” agreement: The parties build in flexibility so that either the company or the remaining owners (or both in sequence) have the option or obligation to purchase the interest upon a trigger. This approach allows stakeholders to weigh tax, cash flow, and financing considerations at the time of the event.
These agreements often address how the buyout will be funded, including business-owned or cross-owned life insurance, bank financing, or installment payments over time. The goal is to strike a balance between delivering value to the departing owner or their family and preserving the company’s financial health.
What Should Your Agreement Cover?
While every document is customized, most well-drafted buy-sell agreements address several core topics:
- Parties and ownership: Who the owners are and what percentage or units each holds.
- Triggering events: Exactly which events (death, disability, retirement, termination of employment, divorce, loss of license, etc.) require or permit a buyout.
- Valuation: How the business will be valued and how often that valuation should be updated to avoid disputes.
- Purchase terms: Who has the right or obligation to buy (other owners, the company, or both), and in what order.
- Payment structure: Whether the price will be paid in a lump sum, over time through installments, with insurance proceeds, or via other financing.
- Dispute resolution: How valuation disagreements or interpretation issues will be resolved, such as through appraisal, mediation, or arbitration.
Because these decisions involve legal, tax, and practical business considerations, it is critical to coordinate with your attorney, tax advisor, and, often, a valuation professional.
Does Your Business Really Need One?
Not every business needs a complex, heavily negotiated agreement from day one, but many more companies should have at least a basic buy-sell in place than actually do. Your business is a strong candidate if:
- There are two or more owners, especially if they are from different families or not equally active in the business.
- A large portion of your personal net worth is tied up in the company.
- You want to keep ownership within the family, among licensed professionals, or within a limited group rather than allowing outside buyers.
- The remaining owners would struggle to buy out a departing partner quickly without planning.
A sole owner may not need a traditional multi-owner buy-sell agreement. However, succession and transition planning remain important, especially if you hope to pass the business to your children, employees, or a future buyer.
Planning Your Agreement with The M Firm
For Texas business owners, a buy-sell agreement is one of the most practical ways to protect a company you have spent years building. The right structure can keep ownership in trusted hands, provide fair value to departing owners or their families, and give employees, lenders, and customers confidence that the business will continue even when life changes.
Entrepreneurs and professionals in Colleyville and throughout the Dallas–Fort Worth area turn to The M Firm for help designing and updating buy-sell agreements as part of a comprehensive succession plan. Attorney Marla Mundheim works with clients to identify likely trigger events, select valuation and funding methods, and coordinate the agreement with operating agreements, estate plans, and tax strategies.
To explore whether your business should adopt or revise a buy-sell agreement, contact The M Firm to schedule a consultation and begin protecting your company’s future.