How do you draft a buy-sell agreement for an LLC with multiple members?

A buy-sell agreement is a contract that defines how the ownership of an LLC will change hands in case of certain events, such as death, disability, divorce, or departure of a member. It can help avoid conflicts, protect the interests of the members, and preserve the continuity of the business. If you are part of an LLC with multiple members, you should consider drafting a buy-sell agreement to plan for the future. Here are some steps to follow:

1 Choose a trigger event

A trigger event is a situation that activates the buy-sell agreement and gives one or more members the right or obligation to buy or sell their shares. Common trigger events include death, disability, retirement, resignation, expulsion, bankruptcy, divorce, or deadlock. You should decide which events you want to include in your agreement and how they will affect the valuation and transfer of the shares.

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Lisa Parshan

Enthusiastically & Energetically Helping Ecommerce Sellers
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I would like to start a new business but do not want the hassle of opening a new LLC. I would like to buy an existing LLC with its accompanying EIN numbers

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Reggie Young

Exit Advisor | Forbes Council, M&A, Growth and Operations
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When drafting a buy-sell agreement for an LLC with multiple members, focus on unique trigger events like key man insurance payout or member incarceration. Use industry benchmarks for valuation adjustments. Define clear exit KPIs and set a formula for share price based on recent EBITDA multiples. Regularly review and update the agreement to reflect current business realities.

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2 Determine a valuation method

A valuation method is a way to calculate the fair market value of the LLC shares at the time of the trigger event. You can use different methods, such as book value, income approach, market approach, or appraisal. You should choose a method that reflects the true worth of the business and is acceptable to all the members. You should also update the valuation regularly or specify a formula to adjust it.

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Reggie Young

Exit Advisor | Forbes Council, M&A, Growth and Operations
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Opt for a hybrid valuation method, blending the income and market approaches to capture both earning potential and market trends. Implement a rolling valuation mechanism tied to quarterly financial reports. Use a pre-determined multiplier on EBITDA for agility. Regularly consult an independent third-party appraiser to ensure fairness and adaptability to market changes.

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3 Select a funding source

A funding source is a means to pay for the purchase of the shares in case of a trigger event. You can use different sources, such as cash, installment payments, loans, insurance policies, or a combination of them. You should choose a source that is feasible and affordable for the buyer and the seller. You should also consider the tax implications and the liquidity of the source.

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4 Define the terms of the sale

The terms of the sale are the conditions and procedures that govern the transfer of the shares in case of a trigger event. You should specify who has the first option to buy or sell, how to notify the other parties, how to resolve any disputes, and how to handle any restrictions or obligations. You should also include any clauses that protect the interests of the remaining members, such as non-compete, confidentiality, or indemnification.

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5 Review the legal requirements

The legal requirements are the rules and regulations that apply to the buy-sell agreement and the LLC. You should check the state laws, the operating agreement, and any other contracts that affect the ownership and operation of the LLC. You should also consult a lawyer, an accountant, and a financial advisor to ensure that your agreement complies with the law and meets your goals.

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6 Sign and store the agreement

The final step is to sign and store the agreement. You should have all the members sign the agreement and keep a copy for their records. You should also store the original agreement in a safe place, such as a lawyer's office, a bank, or a trusted third party. You should review and update the agreement periodically or whenever there is a significant change in the business or the members.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Cary Rowell

Wealth Manager offering Financial Planning and Investment Advisory services through Eagle Strategies LLC, RIA
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Buy Sells are not just for LLCs but may also be important for closely held corporations and partnerships. They are most typically funded with insurance policies but do not have to be.

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How do you draft a buy-sell agreement for an LLC with multiple members?

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1 Choose a trigger event

2 Determine a valuation method

3 Select a funding source

4 Define the terms of the sale

5 Review the legal requirements

6 Sign and store the agreement

7 Here’s what else to consider

Buy-sell Agreements

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