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Most partnerships start with handshake optimism and end with a phone call from one founder’s spouse, ex-spouse, bankruptcy trustee, or estate lawyer. The conversation that follows determines whether the business survives the year. A buy-sell agreement is the document that settles those conversations in advance, and any Dallas business law attorney who has worked through a partner dispute will tell you the same thing: the time to draft one is when everyone still likes each other.
Texas closely held businesses, especially LLCs and S corporations, routinely go years without one. The result, when something happens, is litigation that costs many times what the agreement would have.
What Actually Triggers a Buyout
A well-drafted agreement names the events that force or permit a transfer of ownership. The usual list:
- Death of an owner
- Disability lasting beyond a defined period
- Divorce
- Voluntary withdrawal or retirement
- Termination of employment for owner-employees
- Personal bankruptcy
- Loss of a required professional license
- Criminal conviction involving the business
- Deadlock between equal owners
Each trigger does different work. Death and disability protect the company from inheriting partners who never signed up to be there. The divorce trigger keeps an ownership interest out of community property division. Bankruptcy triggers prevent a trustee from selling the interest to whoever bids highest, sometimes a competitor. Deadlock provisions, occasionally structured as Texas shootouts (one partner names a price, the other chooses to buy or sell at that number), break stalemates before they kill the company.
Owners tend to skip triggers they assume do not apply to them. The 35-year-old founder who never expects to die or get divorced is the most common author of someone else’s litigation.
How Valuation Gets Handled
Valuation is where buy-sell agreements either work cleanly or unravel. Three approaches show up most often in Texas closely held businesses.
Fixed price by annual certificate. The owners sign a one-page document each year confirming the current buyout value. Simple, predictable, and routinely neglected. If the last certificate was signed in 2019 and the company has tripled in revenue since, the heirs will fight it.
Formula valuation. A multiple of EBITDA, a multiple of trailing revenue, or capitalization of earnings. For a Dallas service business, three to six times EBITDA is typical, with adjustments for owner compensation, one-time expenses, and working capital. The formula should specify which financial statements apply (audited, reviewed, or internal) and the look-back period.
Independent appraisal. Each side picks an appraiser; if the two values diverge by more than a stated percentage, a third appraiser sets the number, or the original two average their conclusions. The process costs more but produces the most defensible result for higher-value businesses.
Whatever method gets chosen, the agreement should also address funding. Life insurance covers death cleanly when the policy matches the buyout obligation. Disability buyout insurance handles the harder case. Installment notes (commonly five to ten years at a stated interest rate) cover the rest. Without a funding plan, even a clean valuation can drown the remaining owners in cash flow problems.
What Happens When There Is No Agreement
The Texas Business Organizations Code does not fill in the gap. For LLCs, Section 101.107 and the related provisions generally do not grant a withdrawing member a right to demand payment for the interest unless the company agreement says so. Corporations get even less help: shareholders are stuck with their stock unless the bylaws or a separate agreement provide an exit.
That leads to a few familiar scenarios.
The accidental partner. A founder dies. Under Texas community property rules, the surviving spouse inherits the deceased owner’s share. The spouse, who may have no operational background and no interest in the company, becomes an owner with full information rights and a claim on distributions. The remaining founders cannot force a sale.
The divorcing partner. A divorce decree awards an ex-spouse a portion of an LLC interest. The company now has to share financial statements and may have to write distribution checks to someone the other owners cannot stand. Some judges will order a sale of the interest back to the company; many will not.
The deadlocked 50/50. Two equal owners stop agreeing. No tiebreaker exists. Operations stall. The only real remedies are a receivership, a winding-up petition, or a fiduciary duty or shareholder oppression lawsuit, each of which is slow and expensive. Texas courts narrowed the shareholder oppression doctrine after the Supreme Court’s 2014 decision in Ritchie v. Rupe, which makes self-help through a written agreement even more important.
The departing minority. A 20 percent owner wants out. With no buy-sell, the company is not obligated to buy the interest, and outside buyers rarely want a minority stake in a closely held business. The owner is effectively locked in.
Litigation in any of these scenarios commonly runs into six figures and can take two to four years to resolve. A buy-sell agreement drafted at formation, or before the first major life event, almost always costs less than a single deposition in that fight.
Working With a Dallas Business Law Attorney
The right time to draft a buy-sell is the moment a business has more than one owner, or anticipates having one. The second-best time is now, before any triggering event is visible. Existing agreements deserve a fresh review every few years, after meaningful valuation changes, ownership changes, or amendments to the Texas Business Organizations Code.
For background, the Texas Secretary of State (sos.state.tx.us) publishes guidance on entity formation, and the State Bar of Texas Business Law Section maintains materials on closely held company governance. Both are useful starting points before you sit down with a Dallas business law attorney to draft or refresh an agreement that actually fits your company.
If your partnership currently runs on goodwill alone, fix that this quarter. The triggering event is always cheaper to plan for than to litigate.
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