How Does a Buy-Sell Agreement Work in a Texas Divorce?

A buy-sell agreement is a contract among a business’s owners that sets what happens to an ownership interest when a triggering event occurs. Divorce is a common trigger, but not a universal one, and even when the agreement covers divorce, the price it sets is not automatically the last word in a Texas family court. The agreement binds the owners. The spouse of an owner usually did not negotiate it, and the court dividing the marital estate is not the same as a court enforcing the contract. This page explains what these agreements do, how to find out whether yours covers divorce, how the price is set and when it holds up.

Barton & Associates represents business owners and the spouses of owners in Bexar County. As a San Antonio divorce lawyer practice, we read the agreement before we advise on strategy, and our page for a divorce lawyer for business owners explains the wider picture. The first consultation is free.

What a Buy-Sell Agreement Actually Does

The agreement lists events that trigger a sale of an owner’s interest. The common ones are death, disability, retirement, leaving the business, bankruptcy and divorce. When one occurs, the company or the remaining owners can, or must, buy the affected owner’s interest at a price set by the agreement. Three features differ from one agreement to the next.

• Who buys. In a cross-purchase agreement the other owners buy the interest. In a redemption agreement the company buys it. The choice affects the tax result, which our guide to taxes when a business is divided explains.
• Whether the sale is optional or required. Some agreements give the others an option to buy. Some require the sale. Some give the departing owner the right to demand a purchase.
• How the purchase is funded. Life or disability insurance, company cash, a note paid over time, or a combination.

The Business Organizations Code leaves these agreements in place. Chapter 152 does not impair an agreement for the purchase or sale of a partnership interest, including on death or divorce (Section 152.406), and the LLC statute says the same about membership interests (Section 101.1115). For a corporation, a reasonable restriction on the transfer of shares, including one that requires a holder to offer the shares to the corporation or the other holders before a transfer or requires a purchase, is valid (Section 21.211), and it is enforceable against a transferee if it is noted conspicuously on the certificate or in the notice for uncertificated shares (Section 21.213). A restriction does not bind shares issued before it was adopted unless the holder voted for it or is a party to the agreement (Section 21.210).

An LLC’s company agreement is also written to bind people who did not sign it. It governs relations among members, managers, officers, assignees and the company, and members, managers and assignees are bound by it whether or not they sign it (Section 101.052). That matters when the spouse of a member becomes an assignee on divorce.

Does Your Agreement Actually List Divorce as a Trigger?

Many agreements address divorce directly, to keep an ex-spouse from acquiring a stake in the business. Older agreements, and agreements drafted by a business lawyer without a divorce in mind, often do not. Read the whole document, because divorce can appear in several forms.

• An express divorce or separation trigger.
• A clause on “involuntary transfers,” or transfers “by operation of law or by court order,” which a divorce decree can be.
• A restriction on transfers to a spouse or former spouse, or a requirement that a spouse consent in writing to the agreement.
• A right of first refusal or an option that is triggered by any attempted transfer.
• A definition of “transfer” that includes a division of marital property.

If the agreement is silent, the statutory defaults apply. The spouse of a partner is a transferee of the partnership interest to the extent of the spouse’s interest, and the spouse of an LLC member is an assignee. Neither becomes a partner or member, but each is entitled to the distributions that go with the interest. Our guide to business partners in a Texas divorce explains those rights. Without a formula, value and payment terms are negotiated or decided in the case, which usually costs more.

How the Valuation Formula Typically Works

Agreements set the price in one of three ways, and each has a weakness.

• A fixed price, updated periodically. It is simple and predictable. It goes stale when the owners stop updating it, and an old number can be far from the business’s current value.
• A formula, such as a multiple of earnings or revenue, or book value. It adjusts with the business, but the inputs can be argued, and a formula built on book value may ignore goodwill and growth.
• An appraisal at the time of the trigger. It is the most current and the most objective, and it is slower and costlier, and the agreement must say who picks the appraiser and what standard of value applies.

The standard of value matters as much as the method. An agreement may price the interest with discounts for lack of control or marketability, while a divorce valuation may not apply the same discounts. Our guide to business valuation methods explains why two reasonable valuations can differ. Payment terms also matter: a price paid in installments over years is not the same as a price paid in cash at closing.

Is the Buy-Sell Price Actually Binding in Your Divorce?

Not automatically. The owners’ agreement governs the owners. In the divorce, the court divides the community estate in a manner it deems just and right (Family Code Section 7.001), and it needs a value for the interest to do that. The spouse who did not sign the agreement is not bound by its price merely because the owners agreed to it. The agreement still matters, for two reasons. It may limit what the interest can be sold for or to whom, which bears on what the interest is worth to a buyer. And if it triggers a purchase, the purchase produces cash or a note that becomes part of the estate being divided.

Texas courts have not treated the formula price the same way in every case, and the answer depends on how the agreement came about and what the evidence shows. These are the facts that usually matter.

What Makes a Court More Likely to Honor the Price

• The agreement was negotiated at arm’s length among unrelated owners.
• The price was revisited and updated on the schedule the agreement requires. A price that has been refreshed is far more persuasive than a number set once, years ago.
• A buyout under the agreement is realistic, meaning the buyers have the means to pay and the insurance or funding exists.
• The agreement was signed before the marriage was in trouble, and the spouse signed a consent or knew its terms.

What Makes a Court More Likely to Look Past It

• The agreement was signed or amended in anticipation of the divorce. A transfer or amendment made to defeat a spouse’s claim can be treated as a fraud on the community estate, and the court may award the other spouse a disproportionate share of the rest (Section 7.009).
• The owners are family members or friends and the price looks set to favor one of them.
• The formula is outdated and produces a value far below what the business is worth.
• No one has ever paid anyone under the agreement, so there is no sign it works as written.

What Happens When Divorce Triggers the Buy-Sell

When the agreement treats a divorce as a trigger, the process usually runs in steps. The owner gives notice, or the others learn of the divorce or the decree. An option period starts. The price is set by the fixed number, the formula or an appraisal. The sale closes, often on payment terms. The cash or note that results is community or separate property, depending on the character of the interest sold, and it is part of what the court divides.

Timing is the practical problem. A divorce can take months, and the agreement’s clock may start at the filing, the decree or a transfer. Check the dates before you agree to a settlement. The spouses usually settle the division of the interest at the same time as the buyout, and a divorce mediation lawyer in San Antonio can help line up the owners’ agreement with the settlement so that one does not undo the other. If the company is the buyer, the structure of the redemption affects the tax result, so raise it with your CPA before the settlement is signed.

If You Are the Spouse of an Owner

You may never have seen the agreement. Ask for it early, with every amendment, and look for what you need to know.

• The trigger events and the clauses that apply to a spouse or to a court-ordered transfer.
• The price mechanism and the date the price was last updated.
• Any consent form or joinder that the spouse signed, and what it says.
• The funding: insurance policies, who owns them and what they pay.
• The payment terms for any buyout, including the interest rate, security and default terms.

Do not sign a consent, waiver or settlement that refers to the agreement until someone has read it. Our guide to a spouse’s right to business records explains how to obtain the agreement and the records that show how the business has been valued.

Why This Connects to Valuation and Cost

A buy-sell price that is likely to be honored can shorten the case. The spouses and the court have a number to work from, and the argument becomes whether any adjustment is warranted. A price that is likely to be challenged leads to competing experts, longer discovery and a court that may depart from the agreement’s number. Our page on what a business owner divorce costs explains the other factors that drive the price of a case, and a clear, current buy-sell agreement removes several of them.

Updating a Buy-Sell Agreement Before You Need It

The right time to fix an agreement is when no one is thinking about divorce. These steps keep it useful.

• Confirm that the agreement addresses divorce and involuntary transfers, and that it names who may buy, at what price and on what terms.
• Update a stale price or formula on a schedule, and keep a record of each update.
• Get written spousal consents, signed with time to read them and, where possible, with each spouse’s own lawyer.
• Check the funding. Insurance that has lapsed or is owned by the wrong party defeats the purpose.
• Coordinate the agreement with a written agreement between spouses. Our guide to postnuptial agreements for business owners explains how the two should work together.

An amendment takes the consent of the owners. A partnership agreement can be amended only with the consent of all the partners (Section 152.208), and an LLC’s company agreement is amended according to its own terms. Do not amend an agreement once a divorce is likely if the purpose is to affect your spouse’s claim. A change made for that reason invites a fraud-on-the-community finding, and a restraining order can bar transfers and alterations to records once a case is filed (Family Code Section 6.501). Our guide to protecting your business covers the lawful options.

More About Divorce for Business Owners in San Antonio

These guides cover related questions in more depth. Each one is written for Texas and Bexar County.

• Hidden assets in divorce: how undisclosed property is found and what a court can do about it.
• Prenuptial agreement for high-net-worth couples: what to include when the agreement is signed before the wedding.
• Stock options and executive compensation: dividing equity pay earned during the marriage.
• Are assets split 50-50?: how a court divides the community estate.
• The temporary restraining order: what it bars while the case is pending.
• Keeping a divorce private: what can be sealed and what stays public.
• Dividing an expensive marital home: when a home held by a trust or an LLC changes the cost of the case.
• The Texas Family Code: how the code is organized and where these rules sit.

How We Approach a Buy-Sell Agreement in a Divorce

Barton & Associates has tried Texas cases since 2001, and the family law team includes Duane Graeff, our managing attorney with more than 26 years in Texas state and federal courts, and trial attorney Desirée Flye. We represent the owner or the spouse of the owner, and we say plainly which side we are on from the first meeting.

We start by reading the agreement and its amendments. That shows whether divorce is a trigger, what the price is and how it was set, who is bound and what the timing is. Those answers tell us whether the agreement will help or hinder the outcome you want, and what to negotiate before spending money on experts.

Get a Real Answer for Your Specific Situation

An accurate answer needs the agreement in front of us. Our San Antonio office is at 115 Camaron Street, San Antonio, Texas 78205. You can get directions to our office before your visit. For the first meeting, bring what you can of the following, and call even if you cannot find everything.

• The buy-sell agreement with every amendment, and the operating, partnership or shareholder agreement
• Any spousal consent or joinder that you or your spouse signed
• Records of price or formula updates, including any certificate of agreed value
• Insurance policies that fund the agreement, with the owner and beneficiary named
• Three years of business tax returns, including K-1s, if you have them
• Any prior appraisal or valuation of the business
• Any prenuptial or postnuptial agreement
• Papers you have been served with, if a case has already been filed

Frequently Asked Questions About Buy-Sell Agreements in a Texas Divorce

Does every buy-sell agreement address divorce?

No. Many do not, especially older ones or ones drafted without a family lawyer’s input. If yours is silent, the statutory defaults apply: the spouse of a partner is a transferee, and the spouse of an LLC member is an assignee, with a right to distributions but no vote and no right to manage. Read the actual language, including the clauses on involuntary transfers and transfers by court order.

Must my spouse accept the price in the buy-sell agreement?

Not automatically. The agreement binds the owners, and the court dividing the estate decides the value of the interest under the just-and-right standard (Family Code Section 7.001). A spouse who signed a consent or joinder may be bound to more, so read what was signed. An LLC’s company agreement binds assignees whether or not they signed it (Business Organizations Code Section 101.052).

What if the formula is outdated?

A stale price or formula can produce a value far below what the business is worth, and a court weighing the evidence is less likely to rely on it. The owners can update the agreement together, but a change made once a divorce is likely invites a challenge. Update it on a schedule, before there is a dispute.

Can I update the agreement if a divorce is already underway?

Only with great care. An amendment needs the owners’ consent, and a partnership agreement can be changed only with the consent of all the partners (Section 152.208). A change made to defeat a spouse’s claim can be treated as a fraud on the community estate (Family Code Section 7.009), and a restraining order can bar transfers and alterations to records (Section 6.501). Talk to a lawyer before you propose anything.

How does a buy-sell agreement relate to a postnuptial agreement?

They govern different relationships. The buy-sell agreement governs the owners among themselves, and a postnuptial agreement governs property between spouses. They should be read together, because a term in one can undercut a term in the other, for example if the postnuptial agreement classifies the interest in a way the buy-sell agreement does not expect.

Can my partners buy me out because I am getting divorced?

Only if the agreement gives them that right. Some agreements make divorce a trigger and give the others an option or a duty to buy. Others do not mention it. Chapter 152 and the LLC statute leave purchase agreements in place, including on divorce (Sections 152.406 and 101.1115), so the answer is in the document. The partners cannot force a buyout that the agreement does not provide for.

Does a buy-sell agreement protect the business from my spouse?

It can protect the business’s ownership and management. It does not remove the spouse’s claim to a share of the value. If the interest is community property, the spouse is entitled to a just-and-right division of its value, which is paid in other property, in cash from a buyout or, less often, in distributions from the interest.

Who pays for the buyout?

It depends on the agreement. In a cross-purchase the other owners pay. In a redemption the company pays. Insurance may fund part of it, and a note may cover the rest. The money received is part of the estate being divided, and who is the buyer affects the tax result, so involve a CPA before the settlement is signed.

Will the buy-sell price be the value the court uses?

It may be evidence of value, and a price that was negotiated at arm’s length and updated on schedule carries more weight. It is not binding on a spouse who did not agree to it. Expect each side to argue for the number that favors it and to retain valuation experts if the amounts are large.

What if I never signed the agreement?

If you are the spouse of an owner and you never signed, you are not a party to the contract, but the agreement can still affect you. In an LLC the company agreement binds assignees (Section 101.052). In a corporation, a reasonable transfer restriction is enforceable against a transferee if it is noted on the certificate or the notice for uncertificated shares, or if the transferee actually knows of it (Section 21.213). Ask for a copy as early as you can.

Should I tell my business partners about the divorce?

Check the agreement first. Some agreements start an option period when an owner gives notice, when the divorce is filed or when a decree is entered, and some require notice of a change in ownership. The timing of what you say can matter. Make that decision with a lawyer who has read the document.

Talk to a San Antonio Attorney About Your Buy-Sell Agreement

The agreement you signed years ago may decide how your divorce goes, and what you do before the first hearing can change how it is read. Speak with a divorce attorney in San Antonio at Barton & Associates about your agreement, your business and your goals before you sign or amend anything.

Call our San Antonio office at 210-500-0000 or complete the online Free Consultation form to schedule a confidential meeting with a family law attorney in San Antonio. The office is at 115 Camaron Street, San Antonio, Texas 78205.

Schedule a Free Consultation
Barton & Associates, Attorneys at Law
115 Camaron St, San Antonio, TX 78205
Office: 210-500-0000

Division: Family Law San Antonio
Practice Area: Divorce & Separation
Focus Area: Divorce for Business Owners