Avoid Partner Disputes: TN Buy-Sell Agreement Essentials

A buy-sell agreement (also called a business succession or buyout agreement) sets the rules for if and when an owner exits—by death, disability, retirement, bankruptcy, divorce, deadlock, or a third-party offer. Without it, owners often face disputes over price, timing, voting control, and who can become a new co-owner. In Tennessee, where closely held LLCs and corporations are common, a well-drafted agreement coordinates with your operating agreement or shareholders’ agreement, aligns with state transfer-restriction statutes, and reduces litigation risk.

Core Situations to Address (Triggering Events)

• Death or long-term disability of an owner
• Voluntary retirement or resignation
• Divorce or marital-property division affecting ownership interests
• Personal bankruptcy or creditor foreclosure on an owner’s interest
• Material breach of the operating/shareholders’ agreement
• Deadlock or expulsion under the governing documents
• Third-party purchase offers (rights of first refusal or first offer)

Ownership Transfer Mechanics Under Tennessee Law

Tennessee LLC and corporate statutes allow agreements that limit or condition transfers of ownership interests when those restrictions are stated in the governing documents and properly disclosed. For corporations, certain restrictions must not be manifestly unreasonable and are enforceable against transferees only if noted conspicuously on certificates (or, for uncertificated shares, the holder is provided notice or had knowledge). See Tenn. Code Ann. § 48-16-202 and, for LLC financial rights, Tenn. Code Ann. § 48-249-507.

• Who may buy: the company (redemption), remaining owners (cross-purchase), a trust, or an ESOP.
• Priority: specify the sequence—company redemption first, then cross-purchase, or vice versa.
• Approvals: board/manager/member consents consistent with your charter and operating/shareholders’ agreement.
• Enforceability steps: transfer legends on stock certificates, notice procedures for uncertificated interests, and clear consent requirements.

Valuation: Setting a Price Everyone Accepts

Price fights cause many buy-sell disputes. Choose a method and update it regularly:

• Fixed price reviewed on a set cadence
• Formula-based (e.g., multiple of EBITDA, book value with adjustments)
• Independent appraisal (single appraiser, dual appraisers with a third if needed, or a panel)
• Tailored by trigger (e.g., a formula for retirement, appraisal for death)

Define terms precisely—cash and debt, normalizing adjustments, minority or marketability discounts, and key-person considerations—so parties know what the numbers mean.

Funding the Buyout

• Insurance: Life and disability buyout insurance to fund death or disability triggers.
• Company resources: Redemptions funded through insurance, retained earnings, or credit facilities.
• Seller financing: Notes with interest, amortization, covenants, and acceleration on default.
• Security: Collateral, guarantees, and subordination arrangements as appropriate.

Coordinate policy ownership and beneficiary designations with your agreement and corporate records.

Tax and Entity-Type Considerations

• S corporations: Protect eligibility and one-class-of-stock status. See IRS: S Corporations.
• LLCs taxed as partnerships: Address capital accounts and federal rules like 26 U.S.C. § 704(b) and § 751 (hot assets), plus allocations during the buyout year.
• Insurance ownership: Consider transfer-for-value issues and entity attribution.

Work with tax counsel to align price, terms, and funding with federal and Tennessee tax impacts.

Deadlock and Dispute Resolution

Build in a deadlock breaker that fits your ownership group: a tie-breaker director/manager, rotating chair, a buy-sell trigger (e.g., Texas shoot-out or Dutch auction), or staged mediation followed by arbitration. Tennessee’s Uniform Arbitration Act (Tenn. Code Ann. §§ 29-5-301 et seq.) supports enforceability of properly drafted arbitration provisions. Define the forum, governing law (Tennessee), and interim operating covenants while a dispute is pending.

Protecting Confidentiality and Relationships

Use reasonable and tailored restrictive covenants—confidentiality, nonsolicitation, and, where appropriate, noncompete—to protect goodwill and trade secrets during and after a transition. Reasonableness (scope, geography, duration) improves enforceability under Tennessee law.

Coordinate With Your Governing Documents

• Cross-reference transfer restrictions and include conspicuous legends/notices for equity interests.
• Align voting thresholds for approvals and amendments.
• Synchronize distributions, dividends, and capital calls with buyout obligations.
• Ensure consistency with investor rights, loan covenants, and key employee equity plans.

Practical Drafting Checklist

• Defined triggers and exclusions
• Clear valuation method and update cadence
• Funding sources and backups
• Payment terms, security, and remedies
• Tax allocations and elections
• Insurance ownership/beneficiary alignment
• Transfer restrictions and notice procedures
• Deadlock and dispute resolution path
• Confidentiality and restrictive covenants
• Periodic reviews tied to major events (new owner, financing, material growth)

When to Review and Update

Update after ownership changes, significant financing, major revenue shifts, new locations or business lines, or changes in tax or entity status. Regular reviews with counsel and your CPA help keep price mechanisms current and funding adequate.

FAQs

Do Tennessee laws allow me to restrict who can own shares or membership interests?

Yes, if the restriction is in your governing documents and properly disclosed. For corporations, it must not be manifestly unreasonable and must be noted conspicuously or otherwise noticed to the holder.

Should valuation differ for death versus retirement?

Often yes. Many agreements use insurance-backed appraisal for death and a formula or negotiated method for retirement to balance fairness and cash flow.

Is arbitration a good idea for buy-sell disputes in Tennessee?

Arbitration can provide speed and privacy. If used, draft procedures clearly and reference Tennessee’s arbitration statute.

Can we fund buyouts without insurance?

Yes, using redemptions, bank financing, or seller notes with security. Insurance is still common for death or disability triggers.

How We Can Help

We advise Tennessee founders, family businesses, professional practices, and investor-backed companies on buy-sell strategy, drafting, funding, and implementation. We align the agreement with your governing documents, insurance, tax posture, and growth plans to reduce disputes and support continuity.

Ready to protect your business? Talk with a Tennessee business attorney about a buy-sell agreement tailored to your company.

Disclaimer: This post is for general informational purposes only and is not legal or tax advice. Tennessee laws change and outcomes depend on specific facts. Consult a Tennessee-licensed attorney about your situation.