TN Business Buy-Sell Agreements: Protect Your Legacy
A Tennessee-focused guide to buy-sell agreements for closely held businesses: what they are, why they matter, key terms, valuation and funding options, and how to align with operating agreements, tax planning, and Tennessee law.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a binding contract among business owners that sets the rules for transferring an ownership interest when specific events occur—such as death, disability, retirement, divorce, bankruptcy, termination of employment, or a voluntary sale. It protects the company, the remaining owners, and the departing owner or their family by providing a clear path for transition and valuation.
Why Tennessee Business Owners Need One
Without a written agreement, ownership transfers can be governed by default rules, probate, or court orders, creating uncertainty for operations, taxes, and families. A well-drafted Tennessee buy-sell agreement can:
- Safeguard control among remaining owners
- Reduce disputes by predefining valuation and payment terms
- Preserve S-corporation status by restricting transfers to eligible shareholders and avoiding a second class of stock (see IRS S-Corporations)
- Coordinate with operating or shareholder agreements
- Provide liquidity for heirs
Triggering Events to Address
- Death
- Long-term disability
- Voluntary exit or retirement
- Involuntary separation (for-cause and without-cause)
- Divorce or marital property division
- Personal bankruptcy or creditor claims
- Deadlock or material breach
- Loss of professional license (for licensed practices)
For each trigger, specify whether the purchase is mandatory or optional, who may buy (company, remaining owners, or approved third parties), and the timing.
Ownership Transfer Restrictions Under Tennessee Law
Tennessee law generally permits business entities to restrict transfers of ownership interests through governing documents and separate agreements, subject to statutory requirements.
- Corporations: Transfer restrictions are typically authorized in the charter, bylaws, or a shareholder agreement. To bind transferees without knowledge, restrictions must be conspicuously noted on share certificates or included in the information statement for uncertificated shares. See Tenn. Code Ann. § 48-16-207 (restrictions on transfer and enforceability) and § 48-16-206 (share certificates and information statements).
- LLCs: A transferee of an LLC interest typically receives only financial (economic) rights unless admitted as a member under the operating agreement or applicable statute. See Tenn. Code Ann. § 48-249-507 and § 48-249-508.
Align your buy-sell terms with the company’s charter, bylaws, or operating agreement to help ensure enforceability.
Valuation Methods That Stand Up
A buy-sell agreement should explain how to price the interest. Common approaches include:
- Fixed price (periodically updated by written consent)
- Formula-based (e.g., multiples of EBITDA, book value adjustments)
- Independent appraisal (single appraiser, or multi-appraiser mechanism with averaging)
- Hybrid (formula with appraisal override if variance exceeds a threshold)
Specify discounts or premiums (control, marketability), whether life insurance proceeds affect price, and how to address restrictive covenants that may impact value. For estate and gift tax purposes, consider Internal Revenue Code § 2703 on valuation of property subject to certain rights or restrictions.
Funding the Buyout
Funding provisions keep agreements workable. Consider:
- Life and disability buyout insurance
- Company redemption vs. cross-purchase structures
- Sinking funds
- Bank financing with defined timelines
- Installment notes with interest, security, and subordination terms
Address collateral, personal guarantees, financial covenants, and what happens if financing cannot be obtained on stated terms. Coordinate policy ownership and beneficiary designations with tax and entity goals.
Tax and Estate Planning Alignment
Work with tax and estate advisors to align your agreement with your plan. Topics include: income tax basis considerations; S-corporation eligibility and single class of stock rules; treatment of insurance proceeds; IRC § 2703 valuation considerations; gift and estate planning with spousal or dynasty trusts; and marital property/equitable distribution impacts in Tennessee. Ensure the agreement coordinates with wills, trusts, and powers of attorney, and addresses who may vote or manage interests held in trust.
Key Terms to Include
- Definitions of triggering events
- Right of first refusal and permitted transferees
- Pricing methodology and update schedule
- Closing mechanics and timelines
- Representations and warranties
- Payment terms and security
- Restrictive covenants
- Dispute resolution (Tennessee venue, governing law, and potential mediation or arbitration)
- Confidentiality
- Procedures for amending valuation or insurance schedules
Entity-Specific Considerations
- LLCs: Clarify assignment of economic rights vs. admission as a member, and member approval thresholds.
- Corporations: Ensure transfer restrictions are authorized and conspicuously disclosed on certificates or information statements; consider shareholder agreements for closely held corporations. See TCA § 48-16-207.
- Professional entities: Address licensing requirements and mandatory redemption if a license is lost.
- S-corporations: Limit transfers to eligible shareholders and avoid creating a second class of stock through payment or distribution preferences (see IRS S-Corporations).
Practical Tips for Tennessee Owners
- Keep a signed valuation schedule with dates and owner initials; calendar semiannual reviews.
- Note transfer restrictions on share certificates or include them in uncertificated share notices.
- Coordinate beneficiary designations on insurance with the agreement’s buyout structure.
- Stress test financing terms against current cash flow and lender covenants.
- Document board/member approvals authorizing restrictions and redemptions.
Owner Readiness Checklist
- Identify all triggering events and whether each is mandatory or optional.
- Select and document a pricing method and update cadence.
- Decide on redemption vs. cross-purchase and ownership of policies.
- Define payment terms, interest rate, collateral, and default remedies.
- Include ROFR and permitted transferee provisions.
- Confirm S-corp eligibility protections, if applicable.
- Align with charter/bylaws/operating agreement and estate plan documents.
- Set Tennessee governing law, venue, and dispute resolution.
FAQs
Does a will override a buy-sell agreement in Tennessee?
Generally no. A valid, enforceable buy-sell governs how business interests transfer, and estate documents should be coordinated to avoid conflicts.
How often should we update the valuation?
At least annually or upon material changes such as major financings, acquisitions, or significant EBITDA shifts.
Can we enforce restrictions against a buyer who did not know about them?
For corporations, restrictions typically bind transferees without knowledge only if conspicuously noted on certificates or in information statements for uncertificated shares under Tennessee law.
Is life insurance required?
Not required, but commonly used to provide liquidity for death or disability triggers and to keep payment terms manageable.
How We Can Help
We draft, review, and update buy-sell agreements for Tennessee businesses across industries. Our team coordinates with your CPA, wealth advisor, and insurance professionals to create an agreement that is practical, enforceable, and aligned with your long-term goals. Contact us to get started.
Ready to protect your business? Schedule a consultation today.
References
- Tenn. Code Ann. § 48-16-207 (Restrictions on transfer of shares and other securities; enforceability): link
- Tenn. Code Ann. § 48-16-206 (Share certificates and information statements): link
- Tenn. Code Ann. § 48-249-507 (Transfer of financial rights): link
- Tenn. Code Ann. § 48-249-508 (Rights of transferees and creditors): link
- IRS – S Corporations (eligibility and single class of stock): link
- 26 U.S.C. § 2703 (Valuation rules for certain rights or restrictions): link
- Tennessee Secretary of State – Business Services: link
Disclaimer (Tennessee): This blog is for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship. Laws change and outcomes depend on specific facts; consult a Tennessee attorney about your circumstances. Speak with our team.