A buy-sell agreement decides, in advance, what happens to an owner’s interest in a closely held business when that owner dies, becomes disabled, divorces, retires or leaves. It names who may or must buy, sets the price or the method for finding it, and explains where the money will come from. In California, a buy-sell agreement has to account for rules that do not exist in most states, including community property, a spouse’s right to leave half of the community estate by will, and property tax reassessment when control of an entity changes. As a California buy-sell agreement attorney, Michael Holmes drafts buy-sell provisions for LLCs, corporations and partnerships and coordinates them with the owners’ estate plans.
Holmes Law is a remote practice with no physical office, and California clients work with Michael Holmes directly by phone, video and secure document exchange. This page goes deeper than the broader California business law page. Buy-sell terms usually live inside an operating or shareholder agreement, and companion pages cover entity formation and business contracts.
What a California Buy-Sell Agreement Does
Without a buy-sell agreement, the statutory defaults control. In a California LLC, a transferee of a member’s interest receives only economic rights, and a member who dissociates generally keeps an economic interest without any right to be bought out. In a corporation, shares pass to heirs or to a former spouse like any other property, and the remaining owners may end up in business with people they never chose. A buy-sell agreement replaces that uncertainty with a plan: the business stays with the people who run it, the departing owner or their family receives a fair price, and everyone knows the process before a crisis arrives.
A well-drafted California buy-sell agreement answers four questions: which events trigger a purchase, who buys, what price is paid, and how the purchase is funded.
Triggering Events
Death
Death is the classic trigger. The agreement typically requires the company or the surviving owners to buy the deceased owner’s interest from the estate or trust, often at a price funded by life insurance. The estate gets liquidity, and the survivors keep control.
Disability
Disability needs a definition that works in practice: a period of inability to perform the owner’s duties, a determination by a physician, or a tie to the definition in a disability buy-out insurance policy. Vague disability clauses cause disputes at the worst possible time, and the definition should be coordinated with the owner’s California estate planning documents, including a durable power of attorney that lets an agent act on the owner’s behalf.
Divorce
In California, divorce is a trigger that deserves special attention because of community property. An ownership interest acquired during marriage is presumptively community property under Family Code § 760, and in a dissolution the court can award part of the interest to the non-owner spouse. The buy-sell agreement should give the owner spouse, and then the company or other owners, the right to buy back any interest awarded to a former spouse, at a price set by the agreement.
Departure, Retirement and Termination
When an owner who works in the business retires, resigns or is terminated, the other owners usually do not want a passive owner sharing in future profits. The agreement can distinguish between good leavers and bad leavers, with a lower price or longer payment terms for an owner terminated for cause or who leaves in breach of the agreement.
Other Triggers
Other common triggers include bankruptcy of an owner, an attempted transfer in violation of the agreement, loss of a professional license, and deadlock. Deadlock provisions, such as a shotgun clause, are covered on the operating and shareholder agreements page.
Community Property Issues Unique to California
California’s community property system makes buy-sell drafting more complicated than in most states.
- The non-owner spouse has an interest. If an owner acquired their interest during marriage with community funds or labor, the non-owner spouse likely holds a community property interest in it, even though only the owner appears in the company records.
- The non-owner spouse’s death is also a trigger. Under Probate Code § 100, each spouse may dispose of their one-half of the community property at death. If the non-owner spouse dies first and leaves their half to children from a prior marriage, those heirs may end up with an interest in the business. A California buy-sell agreement should cover the death of an owner’s spouse, not just the owner.
- Growth of a separate property business is apportioned. When one spouse owned a business before marriage and worked in it during the marriage, California courts apportion the growth between separate and community property under the Pereira v. Pereira (1909) 156 Cal. 1 and Van Camp v. Van Camp (1921) 53 Cal.App. 17 approaches. The buy-sell price does not necessarily control that division.
- Management authority. Family Code § 1100(d) generally gives a spouse who is operating or managing a community property business the primary management and control of it, subject to fiduciary duties to the other spouse.
Many California buy-sell agreements include a spousal consent, in which each owner’s spouse agrees to be bound by the transfer restrictions and buyout terms. A spousal consent is valuable, but it is not automatically a change in the character of the property. Under Family Code § 852, a transmutation of property between spouses requires an express written declaration by the spouse whose interest is adversely affected. A consent drafted as an acknowledgment of transfer restrictions will not convert community property to separate property. When the owners want that result, the right tool is a properly drafted marital agreement, such as a postnuptial agreement that meets the California transmutation rules.
Valuation Methods
Price is where most buy-sell disputes happen. The common approaches are:
- Fixed price, updated periodically. Simple, but owners rarely update it, and a stale price can be badly wrong years later. If used, the agreement should fall back to an appraisal if the price has not been updated within a set time.
- Formula. A multiple of earnings, book value or revenue. Formulas are predictable but can drift from actual value as the business changes.
- Independent appraisal. One appraiser, or each side choosing one with a third to resolve differences. The agreement should define the standard of value, the valuation date, and whether minority and marketability discounts apply.
- Different prices for different triggers. For example, full fair market value on death and a discounted price for a departure in breach of the agreement.
For an entity that owns California real estate, valuation should also consider the property tax consequences of the buyout, discussed below.
Funding the Purchase
A price is only useful if someone can pay it. Common funding sources include life insurance, disability buy-out insurance, company cash reserves, installment notes secured by the purchased interest, and bank financing.
Cross-Purchase Versus Entity Redemption
In a cross-purchase arrangement, each owner buys insurance on the other owners and uses the proceeds to buy the deceased owner’s interest directly. In an entity redemption, the company owns the policies and redeems the interest. Cross-purchase plans give surviving owners a stepped-up basis in the purchased interest, but become unwieldy with many owners. Entity redemptions are simpler to administer.
Connelly v. United States (2024)
The U.S. Supreme Court’s decision in Connelly v. United States, 602 U.S. 257 (2024), changed the analysis for entity-redemption plans. The Court held that a corporation’s contractual obligation to redeem a deceased shareholder’s shares is not a liability that offsets the life insurance proceeds the corporation receives for that purpose when valuing the shares for federal estate tax. In practical terms, insurance proceeds held by the company can increase the value of the deceased owner’s interest for estate tax purposes. Owners with large estates who use entity-owned insurance should revisit their structure, and alternatives include cross-purchase plans, insurance LLCs and trusteed arrangements.
Estate Tax, Income Tax and Property Tax Interplay
California does not impose its own estate tax or inheritance tax, so the estate tax question for California owners is federal. For federal purposes, a buy-sell price will be respected for estate tax valuation only if the agreement meets the requirements of Internal Revenue Code § 2703, including that it is a bona fide business arrangement, not a device to transfer property to family for less than full value, and comparable to similar arm’s-length arrangements. Family business agreements get particular scrutiny.
Community property also affects income tax basis. Under Internal Revenue Code § 1014(b)(6), both halves of community property can receive a basis adjustment at the first spouse’s death, which can make a sale shortly after death more tax efficient. The agreement and the estate plan should work together so that the buyout does not waste that benefit.
Property tax is the California-specific trap. When an entity owns California real property, a buyout that gives one person or entity more than 50 percent control, or that causes the original co-owners’ cumulative transfers to exceed 50 percent, can trigger reassessment of the entity’s real property under Revenue and Taxation Code § 64. Changes in control or ownership must be reported to the Board of Equalization on form BOE-100-B within 90 days. A redemption that looks harmless on the capitalization table can move control and cause a large property tax increase, so the transaction should be modeled before it is signed. Holmes Law coordinates this analysis with the California real estate practice.
Restrictive Covenants in a Buy-Sell Context
California broadly prohibits noncompetition agreements under Business and Professions Code § 16600, and recent amendments make that prohibition stronger. The sale of a business is one of the few exceptions. Business and Professions Code § 16601 permits a person who sells the goodwill of a business, or an owner who sells all of their ownership interest in a business entity, to agree not to compete within a specified geographic area where the business is carried on, and §§ 16602 and 16602.5 provide related exceptions for partners and LLC members on dissolution or dissociation. A buy-sell agreement can include a noncompete that fits within these exceptions, but it must be drafted carefully. The business contracts page covers California’s noncompete rules in more detail.
Coordinating With Estate Plans and Trusts
A buy-sell agreement should be read alongside each owner’s will and trust. If an owner’s interest is held in a revocable trust, the agreement should permit that transfer without triggering a buyout and should make the trustee bound by the agreement. At death, the trustee of a California trust needs clear authority to sell under the agreement and to receive payment on the agreed terms. Mismatches between the business documents and the estate plan are a common source of delay and conflict.
Reviewing an Existing Buy-Sell Agreement
Buy-sell agreements age quickly. Owners change, values rise, insurance policies lapse and tax law moves. Holmes Law recommends reviewing a buy-sell agreement whenever an owner joins or leaves, a major valuation change occurs, an owner marries or divorces, or the owners update their estate plans. A review looks at whether the triggers still fit, whether the price mechanism is current, whether insurance is adequate and owned correctly after Connelly, and whether the California community property and property tax issues are covered.
Frequently Asked Questions
Where should a California buy-sell agreement live?
It can be a standalone agreement or part of the LLC operating agreement or shareholder agreement. Putting it inside the governing document keeps the transfer restrictions and buyout terms in one place and binds new owners automatically when they sign on.
Does my spouse need to sign the buy-sell agreement?
In California it is strongly recommended. A spousal consent helps bind the non-owner spouse to the transfer restrictions and price. It does not, by itself, change community property into separate property; that requires an express written transmutation or a marital agreement.
What happens if an owner’s spouse dies first?
Under Probate Code § 100, the deceased spouse can leave their half of the community property interest to someone else. The buy-sell agreement should give the owner or the company the right to buy that interest back.
How does Connelly affect my agreement?
If the company owns life insurance to fund a redemption, the proceeds may increase the estate tax value of the deceased owner’s shares. Owners with taxable estates should review whether a cross-purchase or other structure works better.
Can the buyout price be paid over time?
Yes. Installment payments with interest, security and acceleration on default are common, especially for departures. The terms should be realistic for the company’s cash flow.
Can a buyout trigger property tax reassessment?
Yes. If the entity owns California real property and the buyout causes a change in control or crosses the cumulative 50 percent threshold, reassessment can follow under Revenue and Taxation Code § 64. This should be analyzed before the buyout.
Speak With a California Buy-Sell Agreement Attorney
Holmes Law drafts and reviews buy-sell agreements for California LLCs, corporations and partnerships, with community property, estate tax and property tax issues addressed together. The practice is remote, so meetings happen by phone or video wherever you are in California. To discuss a new buy-sell agreement or a review of an existing one, contact Holmes Law to schedule a consultation with Michael Holmes. Contacting Holmes Law does not create an attorney-client relationship, and this page is general information, not legal advice for your situation.