Question 1

What is a buy-sell agreement?

Accepted Answer

A buy-sell agreement is a legally binding contract signed by all members of a multi-member LLC that creates a mechanism for the orderly purchase of a member's ownership interest when a specified triggering event occurs. It controls who can buy a departing member's interest, under what circumstances, at what price, and on what payment terms — all agreed upon in advance.

Question 2

Why does every multi-member LLC need a buy-sell agreement?

Accepted Answer

Because people die, businesses fail, marriages dissolve, members go to prison, and co-owners fight. Without a buy-sell agreement, members are legally stuck with each other, or with whoever inherits a deceased member's interest, indefinitely. Arizona LLC law does not require any member to sell an interest or any other member to buy one.

Question 3

Can you give a real-life example of what happens without a buy-sell agreement?

Accepted Answer

In 2018 an LLC owned 50/50 by two men lost half its sale value when one member died without a will or trust. His 50% interest passed to his estate, and there was nobody with legal authority to sign for the estate, so a buyer's offer for the entire company fell through.

Question 4

What does a buy-sell agreement actually cover?

Accepted Answer

A well-drafted buy-sell agreement covers triggering events, mandatory versus optional purchases, purchase price, terms and conditions of payment, and funding mechanisms such as life insurance.

Question 5

What are common triggering events in a buy-sell agreement?

Accepted Answer

Common triggers include death, disability, retirement, divorce, bankruptcy, felony conviction, loss of professional license, termination of employment, unauthorized transfer of interest, drag-along and tag-along rights, default under the operating agreement, and filing a false document with the Arizona Corporation Commission.

Question 6

How is the purchase price determined in a buy-sell agreement?

Accepted Answer

Methods include the stated value method, the formula method, the future appraisal method, and the single appraiser method. More than 95% of buy-sell agreements use an appraisal method because co-owners rarely agree on a fixed value or formula when real money is at stake.

Question 7

Does a buy-sell agreement have to require a purchase, or can it just give an option to buy?

Accepted Answer

It can do either. Some triggering events, such as termination of an employee-member, almost always produce a mandatory purchase obligation. Others, such as death, can be mandatory or optional depending on what the members want.

Question 8

How is a buy-out typically paid?

Accepted Answer

A common structure has closing within 60 days, a down payment of at least 20% of the purchase price or available life insurance proceeds, and the balance paid by a five-year promissory note personally guaranteed by the continuing members and secured by a pledge of their membership interests.

Question 9

Can life insurance fund a buy-sell agreement?

Accepted Answer

Yes. Each member purchases a life insurance policy on the other members. When a member dies, the survivors use the proceeds to buy the deceased member's interest from the estate, giving the estate immediate cash and the survivors full ownership.

Question 10

When is the best time to sign a buy-sell agreement?

Accepted Answer

Now, at formation, before anything goes wrong. If members do not sign a buy-sell agreement when they form the company, they almost never will once the business is operating and disagreements begin.

Question 11

Is a buy-sell agreement the same as an operating agreement?

Accepted Answer

No. An operating agreement governs day-to-day management. A buy-sell agreement focuses on what happens when a member needs or wants to exit. A separate, dedicated buy-sell agreement is the better approach for a multi-member LLC with unrelated owners.

Question 12

What is KEYTLaw's fee for a buy-sell agreement?

Accepted Answer

The fee is $1,294 if KEYTLaw formed your LLC within the last 90 days or you are also hiring the firm to prepare an operating agreement. Otherwise the fee is $1,994, which includes one hour of attorney consultation time to review the draft and make revisions.

FAQs about Buy-Sell Agreements
for Multi-Member LLCs

FAQ Summary

FAQs: Buy-Sell Agreements for Multi-Member LLCs

Frequently Asked Questions

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FAQs about Buy-Sell Agreements for Multi-Member LLCs