Buy-Sell Agreement Template

Q: What is a buy-sell agreement?

It is a contract among the owners of a business that sets who may buy an owner's interest, the price or valuation method, and the triggers such as death, disability, divorce, retirement, or a voluntary exit. It keeps ownership inside the group and prevents disputes when an owner leaves.

Q: What is the difference between a buy-sell agreement and an operating agreement?

An operating agreement or bylaws set how the business runs day to day. A buy-sell agreement covers only ownership transitions: what happens to an owner's share on death, disability, divorce, or departure, how it is priced, and who may buy it. Many companies keep both.

Q: What is the difference between a cross-purchase and a redemption buy-sell agreement?

In a cross-purchase, the remaining owners individually buy the departing owner's share, often funded by policies they hold on each other. In a redemption, the business itself buys the share back. A hybrid lets the parties decide which applies when the trigger happens. Each has different tax effects.

Q: How is the business valued in a buy-sell agreement?

By the method the owners choose: a fixed price they restate periodically, a formula such as a multiple of earnings or book value, or an independent appraisal at the time of the trigger. Whatever the method, set it clearly and update it regularly so the price stays realistic.

Q: How is a buyout funded?

Most owners fund it with life or disability insurance on each owner, a sinking fund set aside over time, or installment payments from the buyer after the trigger. The goal is to have cash available when it is needed, matched to the agreed valuation so the buyer can actually pay.

Q: Does a buy-sell agreement need to be notarized?

In most states, no. A buy-sell agreement is valid as a signed writing, with no notarization, witnesses, or government filing required. Keep the signed agreement with the company records and note any transfer restriction on the share certificates. A few state-specific rules may apply.

Q: Do buy-sell agreement rules vary by state?

The core terms are the same everywhere, but some rules vary. Community-property states may require a spouse's consent or notice for a community-property business interest, and states differ on whether a non-compete on a departing owner is enforceable. Use the version for your state for the exact rule.

Set who can buy an owner's share, at what price, and on what triggers, before you ever need it.

Introduction

A buy-sell agreement is a contract among the owners of a business that decides in advance who may buy an owner's share, at what price, and on what triggers such as death, disability, divorce, retirement, or a voluntary exit. It keeps ownership inside the group, gives the remaining owners a clear path to buy, and prevents a forced sale or a dispute when someone leaves. The core terms are the same nationwide: the structure (cross-purchase, entity redemption, or a hybrid), the triggering events, the valuation method, and how the buyout is funded. A few rules do vary by state, most notably spousal consent in community-property states and how a non-compete on a departing owner is enforced, so check the version for your state.

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Key Things to Know

1
A buy-sell agreement is a binding contract among co-owners that fixes who can buy a departing owner's interest, the price or valuation method, and the triggering events, so a death, divorce, or exit does not force the business into a dispute or a sale to an outsider.
2
There are three common structures. In a cross-purchase the remaining owners buy the departing owner's share; in an entity redemption the business itself buys it back; a hybrid or wait-and-see agreement lets the parties choose at the time of the trigger.
3
Set the triggers explicitly. The usual ones are death, long-term disability, retirement, voluntary departure, divorce, and bankruptcy of an owner. Each trigger can have its own price and payment terms, so define them rather than leaving them to negotiation later.
4
Choose a valuation method and keep it current. Common methods are a fixed price the owners restate periodically, a formula such as a multiple of earnings, or an independent appraisal at the time of the trigger. Update the number at least once a year.
5
Fund the buyout before you need it. Owners commonly use life or disability insurance on each owner, a sinking fund, or installment payments, so the buyer has cash when a trigger occurs. Match the funding to the valuation so the price and the money available line up.
6
Some rules vary by state. Community-property states may require a spouse's consent or notice before an owner disposes of a community-property business interest, and states differ on whether a non-compete on a departing owner is enforceable. See the version for your state for the specific rule.
7
No notarization, witnesses, or government filing is required in most states. A buy-sell agreement is valid as a signed writing. Keep the signed agreement with the company records, note any transfer restriction on the share certificates, and review it after major changes. Attorney review is available.

Key decisions before you file

Before you file a Buy-Sell Agreement in South Dakota, a few decisions shape the document: which option to choose and what each one means. The Buy-Sell Agreement guide walks through them.

Open the Buy-Sell Agreement guide

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Buy-Sell Agreement

This Buy-Sell Agreement (the "Agreement") is made on [date] among [Company name], a [state] [entity type] (the "Company"), and the persons who own interests in the Company and sign below (each an "Owner" and together the "Owners").

1. Purpose

The Owners want to keep ownership of the Company within the current group, provide a fair and orderly way to buy an Owner's interest when a triggering event occurs, set the price and payment terms in advance, and give each Owner a ready market for the interest. This Agreement controls the transfer of every ownership interest in the Company.

2. Transfer Restrictions

No Owner may sell, assign, pledge, or otherwise transfer all or any part of an ownership interest except as this Agreement allows. Any attempted transfer that violates this Agreement is void. Before any voluntary transfer to an outside party, the selling Owner must first offer the interest to the Company and then to the other Owners on the terms in Section 5. The Company shall note this restriction conspicuously on each ownership certificate.

3. Triggering Events

An Owner's interest becomes subject to purchase on any of the following: (a) death; (b) permanent disability, as defined in Section 9; (c) retirement or voluntary withdrawal; (d) termination of employment or service; (e) divorce, to the extent an interest would pass to a former spouse; (f) bankruptcy, insolvency, or an assignment for the benefit of creditors; or (g) an attempted transfer in violation of this Agreement.

4. Purchase Structure

The Owners elect one of the following, as stated in the Schedule: (a) Cross-Purchase, in which the remaining Owners buy the departing Owner's interest in proportion to their existing interests; (b) Redemption, in which the Company buys the interest; or (c) Wait and See, in which the Company has the first option and the remaining Owners may buy any interest the Company does not.

5. Right of First Refusal

If an Owner receives a bona fide written offer to buy an interest, the Owner shall give the Company and the other Owners written notice with the offer terms. The Company, and then the other Owners, may buy the interest on the same terms within [number] days. If neither buys, the Owner may complete the sale to the third party on those terms, and the buyer takes the interest subject to this Agreement.

6. Purchase Price and Valuation

The purchase price is the value of the interest determined by the method the Owners select in the Schedule: (a) a fixed price the Owners restate at least once each year; (b) a formula, such as a multiple of earnings or book value; or (c) an appraisal by a qualified independent appraiser as of the valuation date. The Owners should review and update the value regularly so the price stays realistic.

7. Funding

The buyout may be funded by life insurance or disability insurance on each Owner, a sinking fund, installment payments by the buyer, or a combination. Where insurance funds the purchase, the Schedule lists each policy, its owner, and its beneficiary, and the parties shall keep the coverage in force and match it to the current value.

8. Closing and Payment

The closing occurs within [number] days after the price is fixed. At closing, the buyer pays the price in cash or under the payment terms in the Schedule (for example, a down payment with the balance paid over [number] years with interest at [rate]), and the selling Owner delivers the interest free of liens and signs the documents needed to transfer it.

9. Disability

"Permanent disability" means an Owner's inability, because of illness or injury, to perform the Owner's regular duties for [number] consecutive months, determined as the Schedule provides. On permanent disability, the Owner's interest is purchased under the same terms that apply to the other triggering events.

10. General

This Agreement binds the Owners and their heirs, estates, and successors. It may be amended only by a writing signed by all Owners. If a court finds any provision unenforceable, the rest remains in effect. This Agreement is a signed writing and does not require notarization unless the Owners choose to notarize it. Attorney review is available.

Signatures.

Company: ______________________ Date: __________

Owner: ______________________ Date: __________

Complete the bracketed items and the Schedule for your Company. This template is general information, not legal advice; attorney review is available. For state-specific requirements, see the version for your state.

South Dakota Requirements for Buy-Sell Agreement

Business Entity Compliance (South Dakota Codified Laws (SDCL) Title 47)
The agreement must comply with South Dakota's business entity laws based on the type of entity (corporation, LLC, partnership). For corporations, this includes SDCL Title 47 requirements for stock transfers and corporate governance.
Contract Formation Requirements (SDCL § 53-1-1 through § 53-1-5)
The agreement must satisfy South Dakota's contract formation requirements including offer, acceptance, consideration, legal purpose, and competent parties to be legally enforceable.
Statute of Frauds Compliance (SDCL § 53-8-2)
Buy-sell agreements must be in writing if they cannot be performed within one year or involve the transfer of real property interests to comply with South Dakota's statute of frauds.
Securities Law Compliance (SDCL Chapter 47-31B; Securities Act of 1933)
The agreement must comply with both South Dakota securities laws and federal securities laws if the transaction involves the sale of securities, including potential exemptions from registration requirements.
Business Valuation Methods (SDCL § 47-1A-1434 (for corporations))
The agreement must specify legally acceptable business valuation methods under South Dakota law, which may include book value, capitalization of earnings, or appraisal methods.
Right of First Refusal Provisions (SDCL § 47-34A-503 (for LLCs))
South Dakota law permits right of first refusal provisions in buy-sell agreements, but they must be clearly defined and not unreasonably restrict transferability of interests.
Transfer Restrictions (SDCL § 47-1A-627 (for corporations); § 47-34A-503 (for LLCs))
The agreement must comply with South Dakota's laws regarding permissible restrictions on the transfer of business interests, which vary by entity type.
Life Insurance Funding Provisions (SDCL Title 58 (Insurance Code))
If life insurance is used to fund the buy-sell agreement, it must comply with South Dakota insurance laws regarding insurable interest and policy ownership.
Estate Planning Considerations (SDCL Title 29A; Internal Revenue Code § 2703)
The agreement must address South Dakota estate laws and federal estate tax implications, particularly for transfers upon death of an owner.
Tax Implications Disclosure (Internal Revenue Code §§ 1001, 1014, 754)
The agreement should address federal tax implications including potential capital gains taxes, step-up in basis considerations, and alternative minimum tax issues.
Disability Provisions (SDCL § 27B-1-3 (definition references))
The agreement must define disability in accordance with South Dakota law and specify the process for determining disability as a trigger event.
Dispute Resolution Mechanisms (SDCL Chapter 21-25A (Arbitration))
The agreement should include dispute resolution provisions that comply with South Dakota's laws on arbitration and mediation if these methods are selected.
Covenant Not to Compete (SDCL § 53-9-8 through § 53-9-11)
Any non-compete provisions must comply with South Dakota's relatively permissive stance on covenants not to compete, which are enforceable if reasonable in scope, geography, and duration.
Spousal Consent Requirements (SDCL § 25-2-4)
In South Dakota, spousal consent may be required for certain transfers, particularly in community property situations or when marital assets are involved in funding the agreement.
Federal Tax Classification Compliance (Internal Revenue Code §§ 1361-1379 (S-Corps); §§ 701-777 (Partnerships))
The agreement must address implications for the entity's federal tax classification (S-corporation, partnership, etc.) and ensure compliance with IRS requirements for maintaining desired tax status.
Americans with Disabilities Act Compliance (42 U.S.C. § 12101 et seq.)
Disability trigger provisions must comply with federal ADA requirements to avoid discriminatory practices in the forced sale of business interests.
Deadlock Resolution Provisions (SDCL § 47-1A-1430 (for corporations))
The agreement should include mechanisms for resolving business deadlocks that comply with South Dakota's business entity laws regarding judicial dissolution and alternative remedies.
Fiduciary Duty Considerations (SDCL § 47-1A-830 (for corporations); § 47-34A-409 (for LLCs))
The agreement must address the fiduciary duties that business owners owe to each other under South Dakota law, particularly in closely-held businesses.
Choice of Law and Jurisdiction (SDCL § 53-1-4)
The agreement should specify South Dakota law as governing and comply with South Dakota's requirements for forum selection clauses.
Fraudulent Transfer Avoidance (SDCL Chapter 54-8A)
The agreement must be structured to avoid potential challenges under South Dakota's Uniform Fraudulent Transfer Act, particularly regarding the adequacy of consideration for business interest transfers.

Frequently Asked Questions

What is a buy-sell agreement?

What is the difference between a buy-sell agreement and an operating agreement?

What is the difference between a cross-purchase and a redemption buy-sell agreement?

How is the business valued in a buy-sell agreement?

How is a buyout funded?

Does a buy-sell agreement need to be notarized?

Do buy-sell agreement rules vary by state?

Introduction

Key Things to Know

Key decisions before you file

Customize your Buy-Sell Agreement Template with DocDraft

Buy-Sell Agreement

1. Purpose

2. Transfer Restrictions

3. Triggering Events

4. Purchase Structure

5. Right of First Refusal

6. Purchase Price and Valuation

7. Funding

8. Closing and Payment

9. Disability

10. General

South Dakota Requirements for Buy-Sell Agreement

Business Entity Compliance (South Dakota Codified Laws (SDCL) Title 47)

Contract Formation Requirements (SDCL § 53-1-1 through § 53-1-5)

Statute of Frauds Compliance (SDCL § 53-8-2)

Securities Law Compliance (SDCL Chapter 47-31B; Securities Act of 1933)

Business Valuation Methods (SDCL § 47-1A-1434 (for corporations))

Right of First Refusal Provisions (SDCL § 47-34A-503 (for LLCs))

Transfer Restrictions (SDCL § 47-1A-627 (for corporations); § 47-34A-503 (for LLCs))

Life Insurance Funding Provisions (SDCL Title 58 (Insurance Code))

Estate Planning Considerations (SDCL Title 29A; Internal Revenue Code § 2703)

Tax Implications Disclosure (Internal Revenue Code §§ 1001, 1014, 754)

Disability Provisions (SDCL § 27B-1-3 (definition references))

Dispute Resolution Mechanisms (SDCL Chapter 21-25A (Arbitration))

Covenant Not to Compete (SDCL § 53-9-8 through § 53-9-11)

Spousal Consent Requirements (SDCL § 25-2-4)

Federal Tax Classification Compliance (Internal Revenue Code §§ 1361-1379 (S-Corps); §§ 701-777 (Partnerships))

Americans with Disabilities Act Compliance (42 U.S.C. § 12101 et seq.)

Deadlock Resolution Provisions (SDCL § 47-1A-1430 (for corporations))

Fiduciary Duty Considerations (SDCL § 47-1A-830 (for corporations); § 47-34A-409 (for LLCs))

Choice of Law and Jurisdiction (SDCL § 53-1-4)

Fraudulent Transfer Avoidance (SDCL Chapter 54-8A)

Frequently Asked Questions