Buy/Sell Agreement
California LLC buy/sell agreements: the business prenup.
What happens to ownership when something happens to an owner — death, disability, divorce, voluntary exit, retirement. Every multi-member LLC needs answers in writing, before any of those things actually happen.
California-licensed attorney. Buy/sell agreements for multi-member LLCs. Statewide California.
What it is
Predictable events, made into planned events.
A buy/sell agreement is the document that says, in advance, what happens when an LLC owner stops being an owner. Death, disability, divorce, voluntary exit, retirement, removal — all of these are predictable events. The buy/sell agreement makes them planned events instead of crises.
It is sometimes called a business prenup, an LLC owner exit plan, a business partner buyout plan, a cross-purchase agreement, or an entity-purchase agreement. The names refer to slightly different structural choices, but the core idea is the same: in advance, the owners agree on what happens when ownership has to change hands.
For multi-member LLCs, the buy/sell provisions live somewhere — either inside the operating agreement (most common for new formations) or as a standalone agreement (common for existing LLCs adding more thorough exit planning). Either works; the choice depends on complexity and how thoroughly the exit scenarios need to be addressed.
Triggers
When does the buy/sell kick in?
The events that activate the buy/sell. Most agreements address some subset of these; thorough agreements address most.
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Death of a member
The most predictable trigger and often the worst-handled. The buy/sell agreement says whether the surviving members buy the deceased member's interest, whether the estate keeps it, or some combination. Life insurance funding is common.
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Disability that prevents continued ownership
What counts as disability, who decides, and what triggers the buyout. Often paired with disability insurance. The trigger needs a clear definition — "cannot perform substantial duties for X consecutive months" is typical.
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Divorce
Particularly important in California's community-property regime. An LLC interest acquired during marriage is generally community property; divorce can put a non-member spouse in a position to claim part of the LLC. The buy/sell can require a buyout to keep the LLC out of the divorce.
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Voluntary departure or retirement
When a member just wants out — career change, retirement, moving on. The buy/sell sets the price and terms so the departure does not become a negotiation. Notice requirements are common.
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Termination of employment
For LLCs where members are also employees. If employment ends, does the LLC interest end too? The buy/sell says yes or no, and on what terms.
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Bankruptcy of a member
If a member files bankruptcy, their LLC interest becomes part of the bankruptcy estate. The buy/sell can trigger a forced buyout to keep the LLC interest out of bankruptcy court.
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Default on capital obligations
If the operating agreement allows for capital calls and a member fails to contribute, the buy/sell can trigger removal or dilution of the defaulting member.
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Forced sale or creditor seizure
If a creditor obtains a charging order against a member's LLC interest, the buy/sell can trigger a buyout. Also covers liens, garnishments, and similar adverse events.
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Removal for cause
If a member breaches the operating agreement, commits fraud, or otherwise behaves in a way that justifies removal, the buy/sell sets out what happens. Definitions of "cause" vary; this is one of the more negotiated provisions.
Valuation
How is the buyout price set?
The valuation question is the hardest part of any buy/sell agreement. Picking a method before there is a buyout is much easier than picking it after — when the price affects who gets what.
Book value
The simplest. Price equals the LLC's book value (assets minus liabilities) at a stated date, multiplied by the departing member's ownership percentage. Easy to calculate. Often unfair for established businesses with goodwill or appreciated assets that book value does not capture.
Fair market value via appraisal
A qualified appraiser values the LLC at the time of the trigger event. Most flexible — produces a number that reflects current reality. Most expensive — appraisals cost real money and take real time. Often used as a fallback when the parties cannot agree.
Formula based on revenue or earnings
A multiple of trailing revenue, EBITDA, or net income. Predictable. Can age poorly — a formula that made sense at formation may not make sense five years later as the business changes.
Pre-set price reviewed periodically
The members agree on a price annually (or biennially, or at some interval) and that price applies if a trigger event happens before the next review. Clean when actually maintained. Often abandoned in practice — the review meeting is the first thing to slip.
Hybrid approaches
Common compromises: formula with appraisal trigger if the formula produces an obviously wrong number; book value plus an agreed-upon goodwill adjustment; pre-set price with appraisal as a tiebreaker. Hybrids match real-world business changes better than any single method but require more drafting.
Funding
Where does the buyout money come from?
The valuation method picks the price. The funding mechanism picks how the price gets paid. Both need answers — a clean valuation with no funding plan is a number nobody can actually pay.
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LLC cash on hand
Often inadequate for large interests. Works for small buyouts; falls short for substantial ones.
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LLC borrowing
The LLC takes a loan to fund the buyout. Spreads the cost over time but adds debt service to operations. Lenders may require terms that affect how the LLC operates.
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Remaining members' personal funds
Members buy out the departing member personally. Uneven impact — members with more capacity carry more burden, which can affect ownership percentages going forward.
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Life insurance
For death triggers, the most common funding mechanism. The LLC (entity-purchase structure) or each member (cross-purchase structure) holds policies on the lives of all members. Tax characterization differs between the two structures — that conversation belongs with your CPA.
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Disability insurance
For disability triggers. Less common than life insurance because of cost and definitional complexity, but valuable when the disability scenario is realistic.
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Installment payment over time
The buyout is paid in installments over months or years. Reduces immediate cash burden; creates an ongoing obligation to the departing member or their estate. Interest rate and security terms matter.
Buy/Sell vs. Operating Agreement.
The operating agreement governs the LLC while it is running. The buy/sell governs ownership transitions. They overlap, but they answer different questions — and in many LLCs, the buy/sell provisions live inside the operating agreement rather than in a separate document.
For simpler situations, including most new multi-member formations, putting the buy/sell provisions inside the operating agreement is clean and adequate. For more complex situations — multiple classes of members, sophisticated valuation arrangements, life-insurance-funded buyouts, generational planning — a standalone buy/sell agreement gives the topic the room it needs without bloating the operating agreement.
Common buy/sell scenarios.
Five patterns this firm sees most often.
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Two-owner LLC, one wants out
The most common buy/sell scenario. Valuation matters most — a buy/sell with a clear valuation method is the difference between a clean exit and a multi-year dispute. 50/50 LLCs especially benefit from buy/sell provisions that include shotgun clauses or other deadlock-handling mechanisms.
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Owner dies unexpectedly
Without a buy/sell, the deceased member's interest passes to their estate, which means the surviving members now have a new partner — sometimes a spouse, sometimes adult children, sometimes someone they have never met. Life-insurance-funded buy/sell provisions prevent this by requiring the LLC or surviving members to buy the interest at a pre-agreed price.
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Family LLC where adult kids may exit
Generational LLCs add complexity — kids who become members may later want to monetize their interests, sometimes for unrelated personal reasons. Buy/sell provisions tailored to family dynamics keep family ownership transitions from becoming family disputes.
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Real estate LLC with multiple investors
Real estate LLCs often hold appreciating assets, which makes valuation harder and exits more contentious. Buy/sell provisions for real estate LLCs typically address both individual member exits and what happens at property-level events (sale, refinance, foreclosure).
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Owner divorces and the LLC interest is community property
California is a community-property state. Without a buy/sell, divorce can put a non-member spouse in a position to claim part of the LLC, end up with charging-order rights, or force a sale. Buy/sell triggers tied to divorce events let the LLC buy out the affected interest before divorce court has to address it.
What this work actually involves.
Buy/sell engagements run roughly the same way each time. The substantive conversation is the part that takes the most time and matters the most.
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Intake call
Ideally with all members on the call. The substantive questions surface — which triggers matter, how valuation should work, whether funding is needed.
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Engagement letter
Written engagement letter setting fee, scope, deliverables, and refund handling. Signed before any payment is taken.
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Conversation about triggers, valuation, funding
The substance. Members work through the predictable scenarios, the price-setting method, and how a buyout would actually be funded. Drafting takes notes from this.
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Draft
Either a standalone buy/sell agreement or revisions to the existing operating agreement, depending on the structure agreed at intake.
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Review and revisions
Typically one or two rounds of focused changes, with all members involved.
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Execution
Signed by all members. The original signed copy and a clean version go to each member and to the LLC's records.
Pricing
Buy/sell work is offered as part of multi-member formation packages and as standalone engagements.
If you are forming a new multi-member LLC, buy/sell provisions are part of the operating agreement drafted in the Multi-Member formation package. Standalone buy/sell work — drafting a separate buy/sell agreement, or revising an existing operating agreement's exit provisions — is priced by complexity.
Common questions about buy/sell agreements
- Do single-member LLCs need a buy/sell agreement?
- No. Buy/sell agreements address what happens between members. With a single member, there are no other members to buy out or be bought out. Single-member LLCs do need an operating agreement, which serves a different purpose — documenting the separation between the owner and the LLC.
- We are a 50/50 partnership — does this matter for us?
- Especially yes. The 50/50 structure is the most fragile multi-member arrangement, and the buy/sell agreement is what makes it actually workable when one member wants to leave. Without a buy/sell, a 50/50 dissolution often becomes a fight over who gets to buy the LLC and at what price. A buy/sell answers both questions in advance.
- Does my LLC need a separate buy/sell agreement, or is it enough to have it in the operating agreement?
- For most multi-member LLCs, having buy/sell provisions inside the operating agreement is enough. A standalone buy/sell agreement makes sense when the exit planning is more complex than the operating agreement should handle — multiple classes of members, sophisticated valuation arrangements, life-insurance-funded buyouts, generational planning. The intake conversation covers which fits.
- What if we never get around to picking a valuation method?
- Then valuation gets picked when a trigger event happens, by negotiation between people who now have opposing interests, often with a court eventually involved. The price often ends up being whatever ends the dispute — which is rarely what either side originally wanted. Picking the method in advance is much cheaper than picking it under pressure.
- Should we fund the buy/sell with life insurance?
- For death triggers, life insurance is the most common funding mechanism — and for good reason. The LLC or each member holds policies on each member's life; on death, the proceeds fund the buyout. The choice between entity-purchase and cross-purchase structures has tax implications that your CPA should weigh in on. Whether life insurance makes sense for your specific situation depends on the size of each member's interest, the cost of premiums, and what other funding sources are realistic.
- Can we change the buy/sell agreement later?
- Yes. Buy/sell agreements (whether standalone or inside the operating agreement) can be amended by agreement of all members. Reviewing the buy/sell every few years is a good practice — businesses change, valuations change, members' situations change.
Where are you?
Three paths, depending on whether you are forming, fixing, or still working out exit planning with your partners.
Forming a new multi-member LLC
Start with formation
If you are forming a new California LLC with one or more partners, buy/sell provisions are part of the operating agreement drafted in the Multi-Member formation package.
See LLC Formation →Existing multi-member LLC
Book a Consultation
If your existing LLC has weak or missing buy/sell provisions, standalone work starts with an intake call covering triggers, valuation, and funding.
Book a Consultation →Researching
Get the California LLC Checklist
A practical checklist of what California small business owners should think through before forming or fixing a multi-member LLC.
Download the Checklist →Plan the exit before it happens.
California-licensed attorney. Buy/sell agreements for multi-member LLCs. Standalone or inside the operating agreement.