The Agreement Does Not Cover Incapacity
Most Georgia buy-sell agreements cover death. Fewer cover permanent disability. When a business owner suffers a stroke, serious accident, or illness that prevents them from working, the agreement that was supposed to protect the business has no provision for what happens next.
Without an incapacity trigger, the disabled owner retains their membership interest and their entitlement to distributions. The surviving active owners are running the business while paying a departing owner who can no longer contribute. There is no mechanism to buy out the disabled owner’s interest unless the agreement specifically includes incapacity as a triggering event with a defined buyout process.
Fix: add a permanent disability trigger with a clear definition — typically a physician’s determination that the owner cannot return to the same role within 12 months — and a specific buyout timeline and valuation method for disability-triggered events.
The Valuation Language Says “As Agreed by the Parties”
The most dangerous phrase in a buy-sell agreement is “as agreed by the parties at the time of the triggering event.” That phrase means there is no pre-negotiated price and no valuation method. When a triggering event occurs, the parties must agree on a number while one of them is under maximum stress and has every financial incentive to push the price in their direction.
“As agreed” always leads to a dispute. The dispute leads to a business appraisal that both parties fight. The fight leads to litigation. The litigation costs more than the buyout itself in most cases.
A complete valuation provision specifies either a fixed price (with a mandatory annual update) or a formula method — typically a multiple of EBITDA or annual revenue — with a backstop appraisal process if the parties cannot agree on the inputs. The method should be clear enough that an accountant can apply it without any input from the parties.
The Life Insurance Is Outdated or Owned by the Wrong Party
For a buy-sell agreement funded with life insurance, two problems are common: the policy amount is based on the business valuation from when the agreement was signed — often years ago before the business grew — and the policy is owned by the wrong entity.
If the business was worth $1 million when the agreement was signed and is now worth $3 million, a $1 million life insurance policy covers one-third of the buyout. The remaining two-thirds must come from operating capital or a payment plan — defeating the purpose of the funded structure.
Ownership matters because of tax treatment. In a cross-purchase structure, each owner holds a policy on the other owners — the surviving owners receive the death benefit personally and use it to purchase the deceased owner’s interest, which gives them a stepped-up cost basis. In an entity redemption structure, the business holds the policies. Mixing these — where the business owns some policies and the owners own others — can create adverse tax consequences on a future business sale. The ownership of every policy should match the structure specified in the buy-sell agreement.
The Right of First Refusal Has No Mechanism to Fund the Purchase
Most buy-sell agreements include a right of first refusal: if an owner wants to sell their interest to an outside party, the remaining owners have the right to purchase it at the offered price first. The provision is sound in theory. In practice, it fails when the remaining owners have no source of funds to exercise the right.
A right of first refusal without a funding mechanism is an option the owners cannot afford to exercise. The outside party makes an offer. The owners want to block the transfer. They have 30 or 60 days to match the price. They do not have the cash. They let the right expire, and the outside party — a stranger, a competitor, or the departing owner’s spouse — becomes a co-owner.
Fix: the right of first refusal must include a funded mechanism. For closely held businesses, this typically means a sinking fund — a dedicated business account funded monthly — sized to the buyout value, or a line of credit specifically designated for ownership transitions.
The Agreement Was Written for the Business You Had, Not the One You Have Now
A buy-sell agreement drafted when the business had two owners, one LLC, and $800,000 in revenue does not address the business with three owners, two LLCs, and $3 million in revenue four years later. The third owner is not named in the agreement. The second LLC is not covered. The valuation formula produces a number that bears no relationship to the current business value.
Buy-sell agreements require review whenever ownership changes, the business structure changes, or the business value changes significantly. A new owner must be added to the agreement with a specific provision for their interest. Each new entity requires its own coverage. The valuation formula must be calibrated annually to reflect current revenue and margins.
A buy-sell agreement that has never been updated since signing is almost certainly out of date.
The Operating Agreement and Buy-Sell Agreement Were Never Coordinated
The operating agreement controls membership transfers within the LLC. The buy-sell agreement controls the ownership transition between owners. These two documents must be consistent — but they are often drafted at different times by different attorneys with no coordination.
Common conflicts: the operating agreement requires unanimous member consent for any transfer, but the buy-sell agreement allows the departing owner to sell their interest if the remaining owners cannot match the offered price within 60 days. Or the operating agreement defines “transfer” to include a transfer to a trust, conflicting with the estate plan that moves the membership interest into a revocable trust. Each conflict creates a legal ambiguity that must be resolved by negotiation or litigation.
Both documents must be drafted and reviewed together. If they were not, they need to be audited for consistency before a triggering event forces the conflict into the open.
Divorce Is Not Listed as a Triggering Event
A divorce proceeding in Georgia can result in a court awarding a portion of an owner’s LLC membership interest to the divorcing spouse. If the buy-sell agreement does not include divorce as a triggering event and does not include a transfer restriction that prevents court-ordered transfers, the business could end up with an involuntary co-owner who was never a party to the buy-sell agreement.
A complete buy-sell agreement includes a provision stating that any attempted transfer resulting from a divorce proceeding activates the right of first refusal. The remaining owners have the option to purchase the interest that would otherwise be transferred to the spouse at the same value the court would assign it. Without this provision, the business has no legal mechanism to prevent the transfer.
See what a complete buy-sell agreement covers for the full list of triggering events and how each one must be addressed.
