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. Holmes Law prepares buy-sell agreements as a Washington buy-sell agreement attorney for LLCs, corporations, and partnerships, coordinating the business terms with each owner’s estate plan and with Washington’s community property and estate tax rules.
Without a buy-sell agreement, a surviving owner may find himself or herself in business with a deceased partner’s spouse or estate, a former spouse may receive an ownership interest in a divorce, and a departing owner may hold equity with no way to sell it. A Washington LLC member who withdraws has no statutory right to be paid for the interest, and a corporate shareholder generally has no right to be bought out at all. Michael Holmes is admitted in Washington and works with business owners statewide by video and phone. This page provides general information to prepare you for a consultation; it is not legal, tax, or valuation advice for your business.
Why Washington Businesses Need a Buy-Sell Agreement
A buy-sell agreement serves three purposes at once. It keeps ownership within an approved group, it gives a departing owner or an owner’s family a market for an interest that otherwise has no ready buyer, and it sets a price and payment method before anyone knows which side of the transaction they will be on. That last point is the key to fairness: an agreement written while every owner is healthy and cooperative is much more likely to be balanced than one negotiated after a death or a falling-out.
Washington’s statutes make the agreement especially important. The LLC Act, chapter 25.15 RCW, gives a deceased member’s personal representative only the rights of a transferee plus limited rights to settle the estate, and it gives a withdrawing member no right to payment. The Business Corporation Act, Title 23B RCW, allows restrictions on the transfer of shares under RCW 23B.06.270, but it does not create a buyout right for a minority owner who wants out. A buy-sell agreement fills those gaps.
Triggering Events
A Washington buy-sell agreement attorney will walk the owners through each event that could change ownership and decide whether it creates an option to buy, an obligation to buy, or both.
Death
Death is the most common trigger. The agreement usually obligates the company or the surviving owners to buy the deceased owner’s interest, and obligates the estate to sell, often funded with life insurance. A mandatory arrangement gives the family certainty and liquidity and gives the surviving owners control.
Disability
Disability needs a precise definition. Agreements often tie it to a disability insurance policy’s definition or to an inability to perform the owner’s usual duties for a defined period, confirmed by physicians. The agreement should also address who acts for the disabled owner, typically an agent under a durable power of attorney, and whether a disability buyout is optional or mandatory.
Divorce or dissolution of a domestic partnership
In Washington, an interest acquired during marriage is presumptively community property. A dissolution court may award part or all of an owner’s interest to the other spouse. The buy-sell agreement should give the owner, and then the company or the other owners, the right to buy back any interest awarded to a former spouse.
Departure, retirement, and termination
When an owner who also works in the business retires, resigns, or is terminated, the agreement can require or allow a buyout. Many agreements distinguish between a “good leaver” (retirement, disability, termination without cause) and a “bad leaver” (termination for cause, breach, or competing), with a lower price or longer payment terms for a bad leaver.
Other triggers
Bankruptcy of an owner, an attempted transfer in violation of the agreement, loss of a professional license in a professional entity, and a prolonged deadlock are also common triggers.
Valuation Methods
The price term is the heart of the agreement and the provision most likely to cause a dispute if it is poorly drafted. Common approaches include:
- Agreed value. The owners set a value and update it at regular intervals. It is simple, but owners often forget to update it, and a stale value can badly shortchange a family or overpay one.
- Formula. A multiple of earnings, revenue, or book value. Formulas are predictable but may not fit a business whose value changes over time or whose value lies largely in intangibles.
- Independent appraisal. A qualified appraiser determines fair market value or another defined standard at the time of the trigger, sometimes with each side choosing an appraiser and a third resolving differences.
- Hybrid. An agreed value that applies if recently updated, with appraisal as the fallback.
The agreement should define the standard of value (fair market value, fair value, or something else), say whether minority or marketability discounts apply, and state whether life insurance proceeds received by the company are included in value. That last question became critical after the Supreme Court’s decision in Connelly.
Funding the Buyout: Insurance Structures and Connelly v. United States
A buyout obligation is only as good as the buyer’s ability to pay. Life insurance is the usual funding source for death, and disability buyout insurance can fund a disability purchase. The two main structures are:
- Entity redemption. The company owns a policy on each owner and buys back the deceased owner’s interest. It is administratively simple, with one policy per owner.
- Cross-purchase. Each owner owns a policy on the others and buys the deceased owner’s interest directly. The surviving owners typically receive an increased tax basis in the purchased interest. With more than a few owners, the number of policies multiplies, which is why some businesses use a trust or a separate partnership to hold the policies.
In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held that when a corporation owns life insurance to fund a redemption, the insurance proceeds increase the corporation’s value for federal estate tax purposes, and the corporation’s obligation to redeem the shares does not offset that value. The practical result is that an entity redemption funded by company-owned insurance can increase the value of the deceased owner’s estate and, depending on its size, the estate tax. Many owners with redemption agreements have been reviewing whether a cross-purchase, an insurance LLC, or another structure fits better after Connelly. Any change in policy ownership should be reviewed with the insurance professional and CPA because transfers of existing policies can raise income tax issues.
Payment terms for anything not covered by insurance should be spelled out: down payment, promissory note, interest rate, term, security, and acceleration on default. A Washington LLC or corporation must also be able to make the payment lawfully under the distribution limits in its governing statute.
Community Property and Marital Issues in Washington
Washington community property law affects nearly every buy-sell agreement. An owner’s interest acquired during marriage or registered domestic partnership is presumptively community, which means the owner’s spouse has an ownership stake, even if the spouse never signed the operating agreement. Several consequences follow:
- Spousal consent. Washington buy-sell agreements commonly include a consent in which each owner’s spouse agrees to be bound by the transfer restrictions and buyout terms. Under RCW 26.16.030, when both spouses participate in managing a business, neither may sell or encumber its assets or goodwill without the other’s consent, and gifts of community property require both spouses’ consent.
- Death of the non-owner spouse. If the spouse who is not an owner dies first, that spouse’s half of the community interest may pass under his or her will. The agreement should address that event, often through an option to buy the interest or a requirement that the owner-spouse acquire it.
- Divorce. A buy-sell price may not be binding on a Washington dissolution court, which characterizes and values property for the division of assets. The agreement can still control who ends up holding the interest by giving the owner and company a right to buy back any interest awarded to the former spouse.
- Community property agreements. Some Washington couples sign a community property agreement under RCW 26.16.120 that passes all community property to the survivor at the first death. That agreement should be coordinated with the buy-sell so they do not conflict.
Owners considering a prenuptial or postnuptial agreement to characterize a business interest as separate property should raise that when the buy-sell is drafted.
Washington Estate Tax Interplay
Washington has its own estate tax, separate from the federal estate tax and far more likely to apply to a family business owner. For deaths from July 1, 2026 through December 31, 2026, the Washington exclusion amount is $3,000,000, and Washington does not allow portability of an unused exclusion to a surviving spouse. A business interest, plus a home and retirement accounts, can easily put an estate over the Washington threshold.
The buy-sell price can affect the Washington estate tax as well as the federal tax. A price that is consistent with fair market value and set under a bona fide business arrangement is more likely to be respected; a family agreement at a low price may not be. Washington also offers a deduction for qualified family-owned business interests under RCW 83.100.048, with requirements including that the business make up more than half of the Washington taxable estate and that the decedent or family members materially participated in the business, and with recapture if the heirs dispose of the business or stop participating within three years. A mandatory sale to unrelated co-owners at death may be inconsistent with that deduction, so the two should be planned together.
Estate planning tools such as credit shelter trusts in a married couple’s revocable trust, lifetime gifts of business interests, and irrevocable insurance trusts can reduce the tax. See Washington trusts and WA irrevocable trusts.
Restrictive Covenants in a Buy-Sell Agreement
Owners often want a departing owner who is paid for his or her interest to agree not to compete. Washington’s noncompetition statute, chapter 49.62 RCW, strictly limits noncompetes with employees and independent contractors, and legislation signed in 2026 (ESHB 1155) will make noncompetition covenants with employees and independent contractors void starting June 30, 2027, regardless of when they were signed. The statute excludes a covenant made by a person purchasing or selling the goodwill of a business or acquiring or disposing of an ownership interest of at least one percent of the business.
That sale-of-business exclusion is why a noncompete should be tied to the owner’s sale of equity in the buy-sell agreement rather than to his or her employment agreement. An owner who holds less than one percent, or a covenant that appears only in an employment document, may fall under the ban. Nonsolicitation and confidentiality covenants are treated differently; see WA business contracts for the details.
Structuring and Maintaining the Agreement
A buy-sell agreement may be a standalone contract or an article within the LLC agreement or shareholder agreement. Either way, it should be consistent with the governing documents; see WA operating and shareholder agreements. The agreement should also include dispute resolution provisions for valuation disagreements, notice procedures and deadlines for exercising options, and a closing mechanism so that the purchase happens on a set timetable rather than drifting while an estate is administered. Owners should revisit the agreement whenever an owner joins or leaves, the business value changes significantly, insurance coverage changes, an owner marries or divorces, or tax law changes. An annual review of any agreed value is a simple habit that prevents many disputes.
Frequently Asked Questions
What does a buy-sell agreement cost compared to not having one?
Holmes Law quotes fees for a specific engagement after a consultation. The more useful comparison is with the cost of a dispute over a deceased or departing owner’s interest, which can be far greater and can threaten the business itself.
Should we use a cross-purchase or an entity redemption?
It depends on the number of owners, the entity type, basis considerations, and the Connelly decision’s effect on estate value. Many two- and three-owner businesses now favor cross-purchase or insurance-LLC structures, but there is no single answer.
Is the buy-sell price binding in a Washington divorce?
Not necessarily. A dissolution court values and divides community property itself. The agreement can still control ownership by giving the owner and company a right to buy back any interest awarded to a former spouse.
Can the buy-sell agreement include a noncompete?
Yes, if it is tied to the sale of the owner’s interest. Washington’s statute excludes covenants by people selling goodwill or disposing of an ownership interest of at least one percent. Noncompetes in employment agreements are much more limited, and a near-total ban takes effect June 30, 2027.
How does the Washington estate tax affect a buy-sell?
The value of a business interest counts toward the Washington taxable estate, and Washington’s exclusion is much lower than the federal exemption with no portability. The buy-sell price, insurance ownership, and the family-owned business deduction all affect the outcome.
Does my spouse have to sign?
A spousal consent is strongly recommended in Washington, because an owner’s spouse may hold a community property interest in the business.
Speak With a Washington Buy-Sell Agreement Attorney
A buy-sell agreement is one of the most valuable documents a closely held business can sign, and it works best when it is drafted alongside the owners’ estate plans. Holmes Law prepares new agreements and reviews existing ones, including redemption agreements that may need attention after Connelly. Visit the Washington business law page or contact Holmes Law to schedule a consultation.