Structuring Buy-Sell Agreements for Business Partners

A buy-sell agreement is a foundational document for business partners who want to plan for future transitions. Whether dealing with retirement, disputes, disability, or death, this agreement outlines what happens to a partner’s ownership interest. Without one, the business may face uncertainty, valuation disputes, or unplanned changes in ownership.

In Kansas, business law emphasizes the value of clearly written agreements that define how ownership changes are handled. At Coppaken Law Firm in Overland Park, Kansas, we have the experience to help you protect your rights as a business partner and structure practical and legally sound buy-sell agreements.

An Overview of Buy-Sell Agreements

When business partners first launch a company, they often focus on growth and operations. In these cases, legal planning can sometimes fall behind. Failing to address what happens when a partner leaves—voluntarily or otherwise—can lead to confusion or conflict.

Buy-sell agreements offer a written plan that addresses ownership transfer, valuation methods, funding sources, and decision-making processes. These agreements protect the interests of all partners and provide a clear path forward if one leaves the business.

Kansas courts often give great weight to written agreements that reflect informed consent and shared intent. That’s why well-drafted buy-sell agreements carry so much value. They serve as insurance policies against future misunderstandings and help protect the time, energy, and resources that owners invest in their businesses.

When to Draft a Buy-Sell Agreement

The best time to create a buy-sell agreement is at the beginning of the business relationship. However, it’s never too late to put one in place. New contracts can be drafted at any point, including during periods of expansion, succession planning, or restructuring. Some of the key triggers that should prompt the creation of a buy-sell agreement include the following.

• Launching a new partnership or limited liability company (LLC)

• Admitting a new partner to an existing business

• Planning for retirement or ownership succession

• Anticipating tax or estate planning needs

• Addressing recent disagreements among partners

Waiting until a conflict arises can limit your options and potentially increase legal costs. Acting early, however, allows the agreement to reflect shared goals and mutual respect.

Common Events Covered in Buy-Sell Agreements

A thorough buy-sell agreement should address multiple scenarios. While each scenario may require a different process for valuation, approval, and payment, some of the common triggering events a buy-sell agreement can cover include the following.

• The death of a partner

• Permanent disability

• Retirement

• Voluntary departure

• Personal bankruptcy

• Divorce or legal separation

• Involuntary removal

Each situation carries unique risks. For example, if a partner dies without a buy-sell agreement, their ownership interest could pass to a spouse or child. That new owner may not have the skills or interest to remain involved, which could lead to tension or business disruption.

How to Select a Structure That Works

There are several ways to structure a buy-sell agreement, depending on how ownership changes are expected to occur. Each format assigns different responsibilities and obligations, so it's essential to fully understand your options before making a decision. The three most common structures include the following.

• Cross-purchase agreement: Each remaining partner agrees to buy the departing partner’s share. This format works well for smaller businesses where each partner has the means to make a purchase.

• Redemption agreement: The business itself agrees to purchase the departing interest. This structure centralizes the transaction but may impact business cash flow or financial ratios.

• Hybrid agreement: Combines elements of both formats. For example, the business has the first right to buy, and if it declines, individual partners may step in.

Your business considerations, tax treatment, and liquidity all play a role in deciding which structure fits best. To help you decide the best option for your business, we recommend taking the following steps.

1. Address Valuation of Ownership Interests

One of the most debated aspects of a buy-sell agreement is how to value a partner’s ownership interest. Without a clear method, disputes can arise about what the business is worth and how much a departing partner should receive. Several valuation methods can be used, such as:

• Fixed price: All partners agree on a set value, which may be updated annually. This approach is simple but may become outdated quickly.

• Formula-based: The value is based on a formula tied to revenue, EBITDA, or other financial metrics. This keeps valuation tied to performance.

• Independent appraisal: An outside business valuation professional determines fair market value at the time of the triggering event.

Some agreements combine multiple methods. For example, the agreement might call for an appraisal unless the partners have updated a fixed price within the past 12 months. This layered approach helps maintain flexibility while offering clarity.

It’s also important to decide whether discounts will apply for lack of control or marketability. These details should be addressed clearly in writing.

2. Fund the Buyout

A well-written buy-sell agreement doesn’t just describe who can buy ownership; it also explains how the purchase will be funded. Without proper planning, the buyer may struggle to meet the payment terms, especially during an unplanned event like death or disability. Some of the most common funding methods include the following.

• Life insurance: The business or the partners take out life insurance policies, with proceeds used to fund the buyout. This typically works well for death-related triggers.

• Disability insurance: This method provides funds if a partner becomes permanently disabled and can no longer work.

• Installment payments: The buyer pays over time, often with interest. This can help with affordability but requires trust and financial coordination.

• Business reserves or loans: The company uses retained earnings or takes out a loan to fund the transaction.

Your buy-sell agreement should define how the purchase price will be paid, the length of any installment period, applicable interest rates, and default terms. These details matter, especially when cash flow is tight.

3. Address Disputes and Transitions

Even with a buy-sell agreement in place, disputes may still arise. You and your partners may disagree over the valuation, timing, or qualifications of a proposed buyer. That’s why every agreement should include a dispute resolution process. Some primary options may include:

• Binding arbitration

• Mediation

• Use of a third-party business law attorney

• Appointment of an agreed-upon neutral evaluator

The agreement should also describe the timeline for completing the buyout. This includes notice requirements, deadlines for valuation, and closing procedures. By addressing disputes in advance, partners reduce the likelihood of prolonged legal battles and protect the business from long-term disruption.

4. Coordinate With Other Legal Documents

Buy-sell agreements don’t operate in isolation. They must work together with other business documents to avoid conflict or confusion. When drafting a buy-sell agreement, make sure it coordinates and complies with the following documents:

• Operating agreements for LLCs

• Shareholder agreements for corporations

• Partnership agreements

• Employment contracts

• Estate planning documents

Inconsistent language across these documents can lead to delays, lawsuits, or unenforceable terms. For example, if an operating agreement allows a partner’s interest to pass to an heir, but the buy-sell agreement requires a sale of the business, this could create a dispute. Therefore, ensuring clear, consistent language can help avoid these types of problems.

5. Understand Tax Implications

Tax treatment should be considered during the drafting process. Different structures and funding methods can result in varying tax outcomes for both the buyer and the seller. Some key considerations include the following.

• Whether the transaction results in capital gains or ordinary income

• How insurance proceeds are taxed

• Whether installment payments generate interest income

• How redemptions affect the basis of the business

Working with a business law attorney who understands Kansas tax treatment can help you align your agreement with your broader financial goals. You could also consider coordinating with a CPA or experienced tax advisor.

6. Keep Your Agreements Up to Date

A buy-sell agreement isn’t a one-time task. Businesses grow, owners change priorities, and tax laws shift. What worked five years ago may not reflect the current reality. You and your business partners should review your agreement regularly—at least once every two to three years—and consider revisions when any of the following circumstances arise:

• The business experiences significant growth

• New partners are added or current ones leave

• Ownership percentages change

• Valuation methods become outdated

• Tax rules shift

An outdated agreement may lead to unintended results or be challenged during enforcement. Routine reviews keep the document valid and relevant.

Reach Out to a Business Law Attorney Today

Buy-sell agreements aren’t just legal documents; they’re business continuity tools. They reduce uncertainty, protect ownership interests, and provide all parties with a clear understanding of what to expect. When structured properly, they can support the long-term goals of your business and maintain healthy working relationships.

At Coppaken Law Firm, our attorney is committed to representing clients with their business needs. Located in Overland Park, Kansas, we serve clients in Johnson County, Wyandotte County, Douglas County, Shawnee County, Sedgwick County, Riley County, and Jackson County. Contact us today to schedule an appointment.