Texas LLC Buy-Sell Agreements: What Co-Owners Should Have in Writing Before a Sale
If you own a Texas LLC with a partner, you have already entered one of the most consequential financial relationships of your life — perhaps without a plan for how it ends. A buy-sell agreement is a document that can provide that plan. It governs what happens to each owner's interest when a triggering event occurs: death, disability, retirement, divorce, or a partner who simply wants out. Without one, Texas law fills the gap — and the default rules were written for the average LLC, not for yours in particular. Many businesses eventually face some kind of ownership transitions— will you control how that happens, or will a Texas court decide for you?
What a Buy-Sell Agreement Actually Does
A buy-sell agreement — sometimes called a buyout agreement, or when embedded in your LLC operating agreement, a transfer restriction provision — is a binding contract among business owners that answers four questions before a crisis forces you to answer them under pressure:
Who can buy a departing owner's interest — and who is prohibited from becoming your new partner without your consent;
What triggers the buyout obligation — and which events make it mandatory versus optional;
How the interest is valued — the method that determines the price; and
How the purchase is funded — where the money actually comes from.
None of these questions has a fair answer in the middle of a dispute, a bankruptcy, or a probate proceeding. They have fair answers when both owners are aligned, the business is healthy, and nobody has anything to fight about yet. That window — before the triggering event — is the only time a buy-sell agreement can be negotiated on neutral terms.
What Texas Law Says When You Don't Have One
Texas gives LLCs broad freedom of contract, which means the operating agreement governs ownership transitions — when one exists and addresses them. When it doesn't, the Texas Business Organizations Code (TBOC) fills the gap with default rules most business owners have never read. And what does the TBOC say? A member can sell their financial and distribution rights, but the assignee doesn’t automatically become a voting member or manager, and cannot participate in the company’s affairs without unanimous written consent of the existing members. That’s a significant hurdle. Accordingly, if your LLC agreement is silent on buy-outs and if you don’t have a buy-sell agreement, your best option is to try to negotiate a voluntary resolution with your business partner(s).
5 Triggering Events Texas Buy-Sell Agreements Should Address
Most business owners think of buy-sell agreements primarily in terms of death. Death is important, but it is rarely the most likely triggering event in a small or mid-sized Texas LLC. Here are the five scenarios every agreement needs to address — and the Texas-specific considerations for each.
Death
When an owner dies, their membership interest passes to their estate and, ultimately, to their heirs. Without a buy-sell agreement, you may find yourself in business with your partner's spouse, children, or a trust — none of whom you chose as a business partner, and any of whom can assert rights as economic interest holders. A buy-sell agreement funded by life insurance provides the surviving owners with the cash to buy out the estate at a pre-agreed price within a defined period, keeping the business in the hands of the people running it. The promissory note and payment structure for that buyout — including interest rate, installment timing, and security — works much like seller financing in a business acquisition, and the same structuring principles apply.
Disability
Long-term disability is statistically more likely than premature death for business owners under 65, yet it is the triggering event most commonly handled with vague language or left out entirely. The critical drafting question is the definition of disability: how long must the owner be unable to perform material duties, what documentation is required, and does disability trigger a mandatory buyout or merely create an option? Disability buy-sell provisions are often funded with disability buyout insurance.
Retirement and Voluntary Withdrawal
An owner who wants to exit should have a clear, contractual path to do so — and the remaining owners should have the right to acquire the departing interest before it is offered to any outside buyer. A right of first refusal, with defined timelines and a defined valuation method, prevents a scenario where a retiring partner sells to a competitor, a private equity buyer, or any third party the remaining owners did not choose. This is the mirror image of what is discussed in Buying a Business from a Retiring Owner — that post addresses the buyer's perspective on that same transition; the buy-sell agreement is how the seller's partners protect themselves on the other side of it.
Divorce — a Texas Problem?
Texas is a community property state. If a member's ownership interest was acquired during marriage using community funds, the interest itself may be community property subject to division in divorce. The non-member spouse does not automatically become a member — under the TBOC, a transferee of an economic interest only obtains management rights if admitted by the remaining members — but they can obtain a right to distributions and to the value of the interest in the divorce proceeding. A buy-sell agreement that addresses divorce as a triggering event — giving the company or remaining members the right to purchase the divorcing member's interest at a defined price — is the most effective mechanism for keeping an ex-spouse from becoming an indefinite economic stakeholder in your business. Provisions like these are frequently missing from national-template buy-sell agreements or LLC agreements that were not drafted with community property in mind.
Bankruptcy or Personal Insolvency
A member's personal financial troubles can become the company's problem when a creditor obtains a charging order against the member's economic interest in the LLC. A charging order gives the creditor the right to receive any distributions that would otherwise have been paid to the member — but not membership rights. A creditor with a charging order becomes an unwanted economic participant in every future distribution. A buy-sell agreement can grant the company or remaining members the right — or the obligation — to purchase the affected member's interest upon the entry of a charging order, cutting the creditor out of the ongoing economic sFitream.
The Valuation Problem: Why Many Buy-Sell Agreements Fail When They're Actually Needed
The valuation provision can make a Buy-Sell Agreement disastrous if it is poorly drafted. An agreement without an enforceable, sensible valuation method is an agreement that is more likely to see litigation.
Consider these different kinds of valuation methods:
Fixed Price
How it Works: Owners agree on a set dollar value at signing
Pros: Simple, immediate certainty
Cons: Can get outdated very quickly
Formula
How it Works: Price - multiple of revenue, EBITDA, book value, or another methodology
Pros: Automatically “updates” with performance
Cons: Fights over the specific formula inputs replace fights over set pricing
Independent Appraisal
How it Works: Parties hire appraiser(s) at time of event
Pros: Should be most accurate to current value
Cons: Most expensive, can create timing delay
Shotgun
How it Works: One party names a price; the other chooses to buy or sell at that price
Pros: Forces good-faith pricing
Cons: Requires parties to have comparable financial resources in order to work properly
One of the most common failures is the fixed-price agreement that was never updated. A business worth $500,000 at formation may be worth $3 million five years later. An agreement that forces a buyout at the original price either enriches the departing owner or creates a windfall for the acquirer — and either outcome can generate a lawsuit. If you use a fixed price, the agreement should require annual review by a defined deadline, with a default to independent appraisal if the review is missed.
The approach many advisors recommend for Texas LLCs with predictable earnings is a formula based on a multiple of trailing EBITDA or seller's discretionary earnings, with a defined look-back period and a defined multiple benchmarked against comparable transactions in the relevant industry. This is conceptually similar to how contingent value is structured in earnouts and holdbacks in business acquisitions — and the same lesson applies: the more precisely the formula is defined, the less room there is for dispute when the event actually occurs. See How to Structure and Negotiate Earnouts and Holdbacks for a parallel analysis in the M&A context.
Cross-Purchase vs. Redemption: Which Structure Is Right for Your LLC
Once you know what triggers the agreement and how the interest will be valued, the structural question becomes: who is the buyer — the individual remaining members, or the LLC itself?
Cross-Purchase Agreement
Each member individually commits to buying a proportionate share of the departing member's interest. This structure tends to be more tax-efficient when life insurance is involved: insurance proceeds received by a surviving individual member are generally income-tax-free, and the surviving member's basis in the acquired interest steps up to the purchase price. The drawback is administrative complexity with more than two owners — three members each holding cross-purchase policies on one another means six separate insurance policies requiring coordinated premium management and periodic ownership updates as the business grows.
Redemption Agreement (Entity Purchase)
The LLC itself — not the individual members — is the buyer. The company purchases and retires the departing member's interest, and remaining members see their percentage ownership increase proportionately. Simpler to administer with multiple owners, and the funding mechanism is typically a company-owned life insurance policy on each member. One structural risk is that a redemption depletes entity-level assets at exactly the moment the business is absorbing the disruption of losing a key owner.
Hybrid Agreement
The LLC has the first right of redemption; if the company does not exercise it within a specified period, the remaining members have the right or obligation to complete a cross-purchase. This preserves optionality without locking in a structure that may no longer make sense when the triggering event actually occurs.
The Right Time to Negotiate
The right time to negotiate a buy-sell agreement is when all owners have equal leverage, the relationship is healthy, and no party has a strong motivation to push the other out. That moment is almost always at formation or early in the business's life. The wrong time is when one owner is ill, the business is in financial distress, a divorce is pending, or a dispute has already surfaced — because at that point, the party with the stronger position has no incentive to agree to fair terms, and the party with the weaker position has no leverage to demand them.
If your LLC has been operating without a buy-sell agreement or related provisions in its operating agreement — or with a generic online template that has never been reviewed by a Texas attorney — you should consider getting this done. The agreement you can negotiate today, however imperfect the timing, is still a better agreement than the one a Texas court will impose.
Elkhoury Law represents Texas business owners in drafting, reviewing, and updating buy-sell agreements as part of a broader outside general counsel relationship or as a standalone engagement. Contact us before the triggering event schedules the conversation for you.
