Buyout Provisions for Death, Disability, Divorce, or Departure: Operating Agreement Essentials for Construction Companies
Your construction company has three partners. You each own one-third of the LLC. Together, you’ve built the business up to a $20 million/year firm with major commercial projects and a pipeline of work extending for years.
Then the unthinkable happens.
One of your partners — the one who handles all field operations, manages your largest projects, and maintains the relationships with your clients and key subcontractors — dies suddenly in a car accident. By the next afternoon, his widow calls you. She’s grieving, but she’s also practical. She knows her husband’s ownership interest has value. She wants to understand what happens next.
What she doesn’t know: Without him managing the field and the clients, your project execution capability just dropped by 60%. Key clients who trusted his judgment are questioning whether to keep your firm on their bid lists. The projects he brought in are now at risk of delay or cancellation.
By the end of the week, the widow asks: “What’s the company worth, and when will I receive my husband’s share?”
You have no operating agreement that addresses this. Or perhaps even worse, you have a generic template that says “fair market value” without defining how it’s calculated, who determines it, or when payment is due.
Now you’re facing:
A widow who needs liquidity and wants buyout terms that would cripple your working capital;
Key clients questioning your stability and ability to deliver projects on schedule;
A potential valuation dispute that could take 18 months and $200,000 in legal fees to resolve; and
Potential project delays or cancellations because the partner who managed them is gone.
This scenario can happen to anyone in construction. Sometimes, the difference between companies that survive and those that collapse comes down to a single document: the operating agreement, and its buyout and valuation provisions.
Why Buyout Provisions Matter in the Construction Industry
Construction companies face unique challenges when ownership transitions occur mid-stream. Perhaps unlike other professional service firms or retail businesses, construction firms depend on personal relationships and project continuity. Construction is a relationship business. Your clients don't just hire a company—they hire the people they trust to deliver projects on time and on budget. When a key member who managed client relationships and field operations dies or leaves, project continuity is immediately threatened.
A well-drafted buyout provision can address this head-on by specifying valuation methods that account for client relationships, project backlog, and intangible assets that generic EBITDA multiples can miss.
Project-Specific Value Concentration
A construction company's value isn't just in its balance sheet—it's in its backlog, active projects, and relationships with owners and general contractors. When a key member departs:
Projects they brought in may be canceled or not renewed;
Client relationships may not transfer to remaining partners; and
Bid opportunities may dry up.
Operating agreements should value these intangibles or the widow's estate will demand full "fair market value" based on recent profitability that may not be sustainable without the departed member.
Equipment and Asset Ownership Ambiguity
Construction companies own significant tangible assets—equipment, vehicles, tools. When a member contributed equipment to the LLC, ambiguity about whether it was a permanent contribution or a loan creates disputes during buyouts. Clear contribution schedules and buyout provisions specify whether members can reclaim contributed assets or must accept cash value only.
When the "Four D's" Hit Construction Partners
In construction, death, disability, divorce, and departure can cause a variety of disputes. Effective construction company operating agreements address each "D" with specific provisions tailored to construction industry realities.
1. Death: The Immediate Crisis
When a member dies, three things happen simultaneously:
Their ownership interest transfers to their estate or heirs.
The company loses their project management expertise and client relationships.
Key client relationships and project management continuity are threatened.
How your Operating Agreement can address death:
Mandatory Buyout Obligation: Specify that the company or remaining members must purchase the deceased member's interest within a specified timeframe (typically 90-180 days). This prevents the estate from becoming a permanent owner.
Clear Valuation Methodology: Construction companies need valuation methods that capture the full business value. Using book value might miss goodwill, backlog, and client relationships. EBITDA multiples may not capture project-specific value. An independent appraisal is often the best bet, but construction partners should specify the appraisal standards they want in the operating agreement.
Life Insurance Funding: The company can maintain life insurance on each member sufficient to fund the buyout. The Operating Agreement should specify who owns the policy (company vs. cross-owned), the amount of coverage required, and that proceeds from the policy offset the purchase price of the interest.
2. Disability: The Slow-Motion Crisis
Disability is more complex than death because:
The member may recover and return to work.
The company may need their project management expertise during disability.
Disability insurance may fund buyouts, but terms vary.
Clients may question whether a disabled member can perform.
How your Operating Agreement can address disability:
Disability should have a clear definition. You can have definitions for total disability and partial disability, and you can require certification by physicians (perhaps one selected by the company and one selected by the member, with a third if they disagree).
Distinguish between temporary disability (where a member retains ownership but may delegate duties—perhaps receiving a reduced distribution) and permanent disability (triggering buyout).
Require members to maintain disability insurance sufficient to fund buyouts. Companies should specify a waiting period before the buyout is triggered, and should specify whether the insurance proceeds go to the disabled member as income replacement, or the company as buyout funding. Companies should also specify what happens if insurance is insufficient or unavailable.
3. Divorce: The Involuntary Transfer
When a member divorces, their spouse may acquire half their ownership interest. This can create problems:
The ex-spouse may be unqualified to manage a construction company.
The remaining partners may demand she be bought out.
The ex-spouse may want immediate liquidity, forcing a buyout.
How your Operating Agreement can address divorce:
Transfer Restrictions: require that membership interests cannot be transferred to spouses in divorce without consent of other members. Instead, the member must arrange for the spouse to receive other marital assets equivalent to the LLC interest value. Alternatively, the divorce can trigger a buy-sell provision to purchase the member’s interest and give the proceeds to the spouse.
Put Option for Divorcing Member: the operating agreement can allow the divorcing member to require the company to purchase their interest (or the portion awarded to their spouse) at fair market value.
Specify that valuation occurs at the date of divorce filing, not at the date of buyout completion, which could take years in a heavily contested divorce.
4. Departure: The Voluntary Exit
When a member wants to retire or leave for another opportunity, disputes can arise over valuation and other issues:
How their projects and relationships are valued
Whether they can start a competing business
How long payment terms can extend
How your Operating Agreement can address departure:
Non-compete restrictions: reasonable geographic scopes and time periods are necessary if you want your non-compete to be enforceable.
If the departing member brought specific projects into the company, specify whether those projects are valued separately or included in overall company valuation.
Buyouts of departing members can require payment terms that space payments across several years to avoid destabilizing working capital. Specify (a) interest rate, (b) payment schedule, (c) security interests, if any, and (d) acceleration if the company defaults.
Valuation Methodology: The Heart of Many Buyout Disputes
One of the most litigated issues in buyouts is valuation. Construction companies should want valuation methods that capture their unique value drivers. Often, an independent appraisal that has experience with appraising construction companies is everyone’s best bet. But the operating agreement should specify the appraisal standards used, e.g., going concern vs. liquidation value, valuation of intangible assets, and any exclusions (like one-time project losses or working capital fluctuations).
A valuation is meaningless without a funding mechanism. Construction companies need funding that doesn't destabilize working capital or client relationships. Companies should assess their use of life and disability insurance, installment notes, and sinking funds to avoid destabilizing buyouts.
Ready to Protect Your Construction Company?
Construction company buyout disputes are uniquely destructive because they hit when you're already vulnerable. A partner's death doesn't just create a valuation question—it threatens your client relationships, project continuity, and field management capability. A partner's disability doesn't just raise buyout questions—it creates immediate project delivery pressure when you most need stability.
Generic operating agreements often fail construction companies because they don't address:
Client relationship and project continuity transitions;
Backlog and project-specific valuation;
Equipment ownership and contribution;
The interplay between the Four D's (death, disability, divorce, departure);
Life and disability insurance funding; or
Non-compete restrictions tailored to construction.
At Elkhoury Law, I can help you draft buyout provisions that protect project continuity, capture construction-specific value, balance member interests, coordinate with insurance funding, and more. Whether you’re forming a new construction company, bringing in new partners, or updating an existing agreement, I can help you structure buyout provisions that work when crisis hits.
Stay tuned for the installments in this series.
Series Installments:
Part One: Capital Call Provisions
Part Two: Buyout Provisions for Death, Disability, Divorce, or Departure
