Tennessee Buy-Sell Agreements: Protect Your Business Legacy
TL;DR: A buy-sell agreement sets clear rules for who can buy an ownership interest, at what price, and on what terms when an owner exits. For Tennessee LLCs, corporations, partnerships, and professional practices, a tailored agreement supported by a defensible valuation method, realistic funding, and coordinated tax/estate planning helps prevent disputes and protect business continuity. Review the agreement regularly and align it with Tennessee law and your governing documents.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a contract among a company’s owners that governs what happens to an ownership interest when a triggering event occurs—such as death, disability, retirement, divorce, termination of employment, bankruptcy, or a voluntary sale. It sets clear rules for who can buy, at what price, and on what terms, reducing disputes and preserving business continuity.
Why Tennessee Businesses Need One
Tennessee closely held companies—LLCs, corporations, partnerships, and professional practices—often rely on a small number of key owners. Without a buy-sell agreement, an owner’s exit can lead to deadlock, unwanted third-party ownership, costly litigation, or forced liquidation. A well-drafted agreement helps maintain control, protects cash flow, and aligns expectations among owners and families.
Common Triggering Events
- Death or permanent disability
- Retirement or withdrawal from the business
- Termination of employment (for or without cause)
- Divorce or marital property division affecting ownership
- Personal bankruptcy or creditor attachment
- Deadlock or impasse among owners under agreed conditions
- Breaches of restrictive covenants (where enforceable under Tennessee law)
Ownership Structures and Tennessee Law Considerations
LLCs
Operating agreements commonly include buy-sell provisions governing transfers, admission of new members, and dissociation, and may limit or condition transfers of membership interests. Tennessee’s Revised LLC Act addresses operating agreements, member rights, transfers/assignments, and related governance topics (see Tenn. Code Ann. Title 48, Chapter 249, including Part 5 on members and transfers: Title 48, Ch. 249; Part 5).
Corporations
Shareholder agreements and bylaws can include transfer restrictions (e.g., rights of first refusal) and may require or permit company share redemptions, subject to statutory limits on distributions and corporate formalities. Tennessee’s Business Corporation Act addresses shares, distributions, and related restrictions (see Tenn. Code Ann. Title 48, Chapter 16: Title 48, Ch. 16).
Partnerships/LLPs
Partnership agreements can address buyouts upon withdrawal or dissociation and may allocate authority for appraisals and funding. The Tennessee Uniform Partnership Act (2001) governs general partnership relationships and dissociation (see Tenn. Code Ann. Title 61, Chapter 1: Title 61, Ch. 1).
Professional Practices
Professional entity statutes and licensing board rules may limit who can own equity. For example, physician restrictive covenants are subject to specific statutory parameters (see Tenn. Code Ann. § 63-1-148: § 63-1-148). Requirements vary by profession; consult the applicable practice act and board rules (see Title 63 generally: Title 63).
Valuation Methods
Your agreement should specify a defensible valuation method and a process to refresh it periodically. Common approaches include:
- Fixed price updated on a set schedule.
- Formula-based (e.g., a multiple of EBITDA or revenues, with adjustments for debt and non-operating assets).
- Independent appraisal by one or more qualified valuation professionals, with tie-breaker mechanisms.
For estate and gift tax contexts, ensure the valuation approach and agreement terms meet federal standards; otherwise, a stated price may be disregarded. See Rev. Rul. 59-60 (valuation factors for closely held businesses: IRS Rev. Rul. 59-60) and 26 U.S.C. § 2703 (buy-sell price/rights may be disregarded unless statutory requirements are satisfied: 26 U.S.C. § 2703).
Include any discounts or premiums (e.g., lack of marketability, minority interest) only if they align with your goals and anticipated tax treatment.
Funding the Buyout
Plan how the purchase will be funded so terms are realistic and enforceable:
- Life and disability buyout insurance (entity-owned or cross-purchase).
- Sinking funds or reserve accounts.
- Promissory notes with reasonable interest and amortization, potentially with security.
- Bank financing, subject to covenants.
Coordinate policy ownership, beneficiary designations, and premium responsibilities with your agreement’s structure, and confirm that funding sources comply with corporate/LLC distribution and solvency rules.
Transfer Restrictions and Rights
Common tools include rights of first refusal or first offer, mandatory buyout on specified events, consent requirements for transfers, drag-along and tag-along rights for major transactions, and confidentiality and dispute-resolution clauses. Non-compete and non-solicit covenants are generally enforceable in Tennessee if reasonable in scope, duration, and geography and supported by a protectable business interest, though specific professions (e.g., physicians) have statutory limits (see Murphy v. E.R. Carpenter Co., Inc., 661 S.W.2d 833 (Tenn. 1983); physicians: § 63-1-148).
Tax and Estate Planning Alignment
Coordinate your buy-sell agreement with estate plans and beneficiary designations. Consider income tax and transfer tax implications, basis step-up dynamics, and the differences between cross-purchase and entity-redemption structures. Keep comprehensive valuation records to support financial reporting and potential audit review (see Rev. Rul. 59-60; 26 U.S.C. § 2703).
Practical Tips
- Document who has decision authority to initiate a buyout and how deadlocks are resolved.
- Set timelines for notices, elections, funding, and closing to avoid ambiguity.
- Align insurance ownership/beneficiaries with the chosen structure to prevent unintended tax results.
- Reconfirm bank covenants allow redemptions or distributions before committing to terms.
- Schedule an annual valuation refresh or trigger-based update.
Owner Readiness Checklist
- Identify triggering events and define mandatory vs. optional purchases.
- Select valuation approach and specify discounts/premiums.
- Choose cross-purchase, redemption, or hybrid structure.
- Confirm funding sources (insurance, cash, debt, notes) and terms.
- Update operating/shareholder/partnership agreements for consistency.
- Address transfer restrictions, ROFR/ROFO, drag/tag, and consent rights.
- Incorporate restrictive covenants where enforceable.
- Coordinate with estate plans and beneficiary designations.
- Calendar review dates and responsibilities.
Steps to Implement
- Assess ownership goals, roles, and exit horizons.
- Choose structure: cross-purchase, entity redemption, or hybrid.
- Select valuation method and update process.
- Determine funding sources and insurance levels.
- Draft transfer restrictions and governance mechanics.
- Integrate with operating, shareholder, or partnership agreements.
- Obtain required approvals and update ownership records.
- Calendar periodic reviews and trigger audits.
FAQ
Do we need a buy-sell agreement if we already have an operating or shareholder agreement?
Yes. Many governing documents lack detailed triggers, valuation mechanics, or funding terms. A dedicated buy-sell section or standalone agreement fills those gaps.
How often should we update the valuation?
At least annually or upon material changes such as major customer wins/losses, debt changes, or market shifts.
Are non-competes enforceable in Tennessee?
Generally yes if reasonable and supported by a protectable interest, but some professions (e.g., physicians) face specific statutory limits.
What is better: cross-purchase or redemption?
It depends on owner count, tax basis goals, insurance administration, and lender covenants. Many choose hybrids to balance pros and cons.
Can we finance a buyout over time?
Yes, via promissory notes with reasonable interest, amortization, and security, provided you comply with solvency and covenant limits.
How We Can Help
We advise Tennessee founders, family businesses, professional practices, and investor-backed companies on drafting, updating, and enforcing buy-sell agreements. We coordinate with your tax advisors and valuation professionals to create practical, fundable terms that preserve value and minimize disputes. Contact us to discuss your goals.
Disclaimer
This post provides general information for Tennessee businesses and is not legal, tax, or financial advice. Reading it does not create an attorney-client relationship. Laws change and vary by situation; consult counsel about your specific circumstances.