A buy-sell agreement decides, in advance, what happens to an owner’s share of a business when that owner dies, becomes disabled, divorces, retires, or simply wants out. Without one, a Texas business can end up with a deceased owner’s surviving spouse or heirs as co-owners, a former spouse holding a community property claim to the company, or a departing founder who keeps a large ownership stake without contributing anything. A Texas buy-sell agreement attorney helps owners choose the triggering events, set a fair valuation method, fund the purchase, and coordinate the agreement with Texas community property law and each owner’s estate plan.
Holmes Law is the practice of Michael Holmes, an attorney licensed in Texas who works remotely with business owners across the state. This page explains how buy-sell agreements work for Texas LLCs, corporations, and partnerships, and why Texas marital property rules make them especially important here. It is general information rather than legal advice, and it is part of Holmes Law’s Texas business law practice.
What a Texas Buy-Sell Agreement Does
A buy-sell agreement is a contract among the owners of a business, and usually the business itself, that restricts transfers of ownership interests and creates rights or obligations to buy an interest when specified events occur. It can be a standalone agreement or a set of provisions inside an LLC company agreement or a corporate shareholders’ agreement. Holmes Law’s page on Texas operating and shareholder agreements covers the broader governance document; this page focuses on the buyout provisions.
A well-drafted buy-sell agreement serves several purposes at once:
- It keeps ownership among people who are active in the business, or at least approved by the owners.
- It gives a departing owner, or the owner’s family, a market for an interest that otherwise would be hard to sell.
- It sets a price or a pricing method before anyone knows which side of the transaction they will be on.
- It provides a plan for paying the price, often through insurance or installment payments.
- It can help establish value for federal estate tax purposes, if it meets the requirements of the Internal Revenue Code.
Texas law supports these arrangements. Section 21.211 of the Texas Business Organizations Code expressly permits corporations to impose transfer restrictions, including obligations to sell or rights to buy shares, and an LLC’s company agreement can include similar provisions. For corporations, Section 3.202 requires a transfer restriction to be noted conspicuously on the share certificate, or in the notice for uncertificated shares, to be enforced against a person who lacks actual knowledge of it.
Triggering Events
The heart of a buy-sell agreement is the list of events that trigger a purchase right or obligation. Each trigger should specify who may or must buy, whether the purchase is optional or mandatory, the price, and the payment terms.
Death
On an owner’s death, the most common arrangement is a mandatory purchase from the owner’s estate, which gives the family liquidity and the surviving owners control. In Texas, the purchase is usually handled by the executor or administrator appointed under the Texas Estates Code, or by the trustee if the interest was held in a trust. A clear buy-sell agreement makes the executor’s job simpler because the price and terms are already fixed.
Disability
Disability is harder to define than death. The agreement should define disability precisely, often by reference to a disability insurance policy or a period of inability to perform duties, such as a set number of consecutive months, and should explain how disputes over whether a disability exists are resolved. A buyout after disability can be optional, allowing the business to wait and see whether the owner recovers.
Divorce
Divorce is a major risk for Texas businesses because Texas is a community property state, as discussed below. A divorce trigger typically gives the owner-spouse, and then the company or the other owners, a right to buy back any interest awarded to the non-owner spouse.
Departure, Retirement, and Termination
For owners who also work in the business, the agreement should address voluntary resignation, retirement, and termination of employment. Many agreements use different prices for different departures, for example full value for retirement after a set number of years and a reduced value for a departure for cause, sometimes called good-leaver and bad-leaver provisions. Because Texas LLC members have no statutory right to withdraw, as Section 101.107 of the TBOC provides, the agreement is often the only route to an orderly exit.
Other Triggers
Other common triggers include bankruptcy, an attempted transfer in violation of the agreement, loss of a professional license required for ownership, a material breach of the agreement, and a deadlock that the owners cannot resolve.
Valuation Methods
Price disputes are the most common source of buy-sell litigation. The main approaches are:
- A fixed price, agreed in writing and updated periodically. This is simple, but owners often forget to update it, leaving a stale price in place when a trigger occurs.
- A formula, such as a multiple of earnings, revenue, or book value. Formulas are predictable, but they can drift away from real value as the business changes.
- An independent appraisal by a qualified business appraiser, sometimes with a process for each side to hire an appraiser and a third appraiser if they disagree.
- A hybrid, such as a fixed price that is used only if it has been updated within a set period, with an appraisal otherwise.
Whatever method is chosen, the agreement should define the standard of value, such as fair market value or a defined “agreed value,” and state whether discounts for lack of control or lack of marketability apply. It should also define the valuation date and address how life insurance proceeds and the purchase obligation are treated in the valuation, a point that became critical after the Supreme Court’s decision in Connelly.
Funding the Buyout: Cross-Purchase vs. Entity Redemption
A buy-sell agreement is only as good as the ability to pay the price. Common funding sources include life insurance, disability buyout insurance, company cash reserves, bank financing, and installment payments secured by a promissory note and a pledge of the purchased interest.
Entity Redemption
In an entity redemption, or stock redemption, arrangement, the business owns insurance on each owner and buys back the departing owner’s interest. It is administratively simple because the company holds one policy per owner.
Cross-Purchase
In a cross-purchase arrangement, the owners own insurance on one another and buy the interest directly. The surviving owners generally receive a basis increase for the price they pay, which can reduce tax on a later sale. With many owners, the number of policies grows quickly, and some owners use a trust or a separate LLC to hold the policies. Transfers of existing policies need care because of the federal transfer-for-value rules.
Connelly v. United States (2024)
In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held that life insurance proceeds received by a corporation to fund its obligation to redeem a deceased shareholder’s shares are included in the corporation’s value for federal estate tax purposes, and that the redemption obligation does not offset those proceeds. The practical effect is that an entity-redemption structure funded with insurance can increase the value of a deceased owner’s interest, and potentially the estate tax. After Connelly, many owners are revisiting entity-redemption agreements and considering cross-purchase structures, insurance LLCs, or other designs. The right choice depends on the number of owners, their ages and health, and whether their estates are large enough to face federal estate tax.
Texas Community Property and Buy-Sell Agreements
Texas community property law is the feature that most distinguishes Texas buy-sell planning from planning in common-law states. Under the Texas Family Code, property acquired during marriage is presumed to be community property, and a business interest acquired during marriage with community funds or effort is usually community property even when only one spouse’s name is on the ownership records. An interest owned before marriage, or received by gift or inheritance, is generally separate property, though the community estate may have a reimbursement claim for uncompensated time, toil, talent, and effort a spouse devoted to a separate-property business.
The Non-Owner Spouse on Divorce
In a Texas divorce, the court divides the community estate in a manner it deems just and right. That can include awarding part of a community business interest to the non-owner spouse, or awarding the business to the owner-spouse and offsetting with other assets. A divorce trigger in the buy-sell agreement, combined with transfer restrictions, helps keep the business interest in the owner-spouse’s hands or with the company.
The Non-Owner Spouse on Death
Community property creates a death problem many owners overlook. When a married owner dies, the surviving spouse already owns his or her half of the community interest outright; only the deceased owner’s half passes under the will or by intestacy. And if the non-owner spouse dies first, that spouse’s half of the community interest passes under that spouse’s own will, possibly to children or a trust, and not necessarily to the owner. A Texas buy-sell agreement should expressly cover both situations, giving the company or the other owners a right to buy the surviving spouse’s interest and any interest passing from a deceased non-owner spouse.
Spousal Consents
Because a spouse may hold a community interest, Texas buy-sell agreements commonly include a spousal consent in which each owner’s spouse acknowledges the agreement and agrees to be bound by its transfer restrictions and pricing. Some couples also sign a marital agreement that characterizes the business interest as separate property. These documents should be prepared with care, because each spouse’s rights are at stake, and the non-owner spouse may wish to have independent counsel.
Estate Tax and Estate Planning Interplay
Texas does not impose a state estate tax or inheritance tax, so the tax focus is federal. A buy-sell price will be respected for federal estate tax purposes only if it satisfies Section 2703 of the Internal Revenue Code and related regulations, which generally require a bona fide business arrangement, that the agreement not be a device to transfer property to family members for less than full consideration, and terms comparable to similar arm’s-length arrangements. Agreements among family members receive particular scrutiny.
The buy-sell agreement should work with each owner’s will and trusts. Common coordination points include:
- Allowing transfers to an owner’s revocable trust without triggering a buyout.
- Holding life insurance in an irrevocable life insurance trust in a cross-purchase design, where appropriate.
- Making sure the executor or trustee has authority to sign closing documents.
- Aligning the timing of payments with the estate’s liquidity needs.
Holmes Law’s Texas estate planning practice can review the buy-sell agreement and estate documents together so they do not conflict.
Restrictive Covenants in Buy-Sell Agreements
When an owner sells out, the remaining owners often want protection against that owner competing or soliciting customers and employees. Texas enforces noncompetition covenants under Section 15.50 of the Texas Business and Commerce Code if the covenant is ancillary to or part of an otherwise enforceable agreement and contains reasonable limitations as to time, geographic area, and scope of activity. A covenant given in connection with the sale of an ownership interest and its goodwill is generally viewed more favorably than an ordinary employee noncompete, but it must still be reasonable, and a court can reform an overbroad covenant under Section 15.51.
Health care practices face special rules. Effective September 1, 2025, Senate Bill 1318 amended Section 15.50 and added Section 15.501, limiting noncompetes for physicians, dentists, nurses, and physician assistants to one year and five miles, and capping required buyout amounts at the practitioner’s annual salary and wages at termination. Medical and dental practice buy-sell agreements should be reviewed against these rules. Holmes Law’s page on Texas business contracts discusses noncompete law in more detail.
Common Mistakes
Buy-sell agreements fail for predictable reasons:
- A fixed price that was never updated.
- Insurance that lapsed, was never purchased, or does not match the obligation.
- No provision for the non-owner spouse’s community interest.
- A mandatory purchase with no realistic way to pay, straining the business after an owner’s death.
- An entity-redemption structure adopted before Connelly that has not been reconsidered.
- Inconsistent terms between the buy-sell agreement, the company agreement, and the owners’ estate plans.
Frequently Asked Questions
Do we need a buy-sell agreement if we already have a company agreement?
Your company agreement may already include buy-sell provisions, but many do not address valuation, funding, or spouses in any detail. It is worth reviewing the agreement for each trigger discussed above.
Which is better after Connelly, cross-purchase or entity redemption?
Neither is right for every business. Connelly makes insurance proceeds held by the company part of its value for estate tax, which matters most when an owner’s estate may be taxable. Cross-purchase designs avoid that issue but add complexity. The choice should be made with the owners’ estate plans in view.
Does my spouse have to sign our buy-sell agreement?
Texas law does not strictly require it, but because a spouse may own a community interest in the business, a spousal consent is a common and prudent way to bind the spouse to the transfer restrictions and price.
How often should the valuation be updated?
If the agreement uses a fixed price, owners should update it at least annually, and the agreement should include a fallback method if they do not. Formula and appraisal provisions should be reviewed when the business model changes.
Can a buy-sell agreement stop a former spouse from becoming an owner?
It can greatly reduce that risk. Transfer restrictions, a divorce trigger, and spousal consents together allow the owner-spouse or the company to buy back any interest awarded in a divorce, so the former spouse receives value rather than a seat at the table.
Speak With a Texas Buy-Sell Agreement Attorney
A buy-sell agreement is a plan for the moments business owners least like to think about. In Texas, community property rules, the absence of a withdrawal right for LLC members, and the Connelly decision make careful drafting especially important. Holmes Law prepares and reviews buy-sell agreements for Texas LLCs, corporations, and partnerships and coordinates them with owners’ estate plans. To discuss your business with a Texas buy-sell agreement attorney, contact Holmes Law.