Arizona Buy-Sell Agreements: Secure Succession Now

Why Arizona businesses need a buy-sell agreement

Without a written succession plan, transitions can trigger deadlock, cash strain, valuation fights, and loss of control. A buy-sell agreement (also called a business succession agreement or a buyout provision in a shareholders’ or operating agreement) sets the rules for who can buy, when, how price is determined, and how the purchase is funded. Arizona law allows governing documents to limit and regulate transfers—for example, corporate share transfer restrictions (A.R.S. § 10-627) and LLC operating agreement terms controlling member rights and transfers (A.R.S. § 29-3105; A.R.S. § 29-3502).

Events that typically trigger a buyout

Common triggers include:

• Death
• Permanent disability
• Retirement or voluntary exit
• Bankruptcy or insolvency
• Loss of required professional license
• Material breach of a governing agreement
• Divorce or other domestic relations orders affecting ownership
• Deadlock among owners

Define each event, who may initiate, whether the purchase is mandatory or optional, and the timeline to close.

Core structures: cross-purchase vs. entity redemption

• Cross-purchase: Remaining owners buy the departing owner’s interest. This can provide a basis step-up to the purchasing owners and works well with a small number of owners.
• Entity redemption: The company redeems the departing owner’s interest, which can simplify administration with multiple owners.

Hybrid models can blend both—e.g., the entity redeems up to a threshold and owners purchase any balance—to help balance tax basis and funding logistics.

Valuation: setting a price you can live with

Clarity on price prevents conflict. Common methods include:

• Fixed price (update periodically)
• Formula-based (e.g., EBITDA multiple or adjusted book value)
• Appraisal-based (one or more independent appraisers, with tie-breakers)
• Tiered approaches (different methods for different triggers)

Address discounts/premiums (e.g., marketability, control), treatment of liabilities, and payment timing. Arizona courts typically enforce unambiguous, negotiated valuation terms, subject to statute and public policy.

Funding the buyout

• Insurance: Life insurance and disability buyout insurance aligned to your structure (cross-purchase vs. redemption).
• Reserves: Sinking funds or capital reserves maintained by the company.
• Seller financing: Promissory notes with security interests, covenants, and remedies.
• Third-party financing: Bank loans with any required lender consents.

Coordinate policy ownership, beneficiaries, premium obligations, and collateral assignments with your buy-sell terms and governing documents.

Align with Arizona entity statutes and governing documents

Integrate your buy-sell with the company’s articles, operating agreement, bylaws, and shareholder agreements. Arizona statutes allow transfer restrictions and related mechanics in governing documents—see share transfer restrictions for corporations (A.R.S. § 10-627) and the scope of the LLC operating agreement and transfer provisions (A.R.S. § 29-3105; A.R.S. § 29-3502). Ensure consistency across documents to avoid enforceability issues.

Restrictions on transfer and consent rights

To maintain ownership stability, clearly state prohibited transfers, permitted transfers (e.g., to certain trusts or family members), required notices, consent thresholds, and timing. Rights of first refusal or first offer should spell out timelines, notice contents, escrow mechanics, and closing procedures. In LLCs, remember that transferring a transferable interest typically conveys economic rights only; transferees do not become members without consent as provided by statute or the operating agreement (A.R.S. § 29-3502).

Managing community property and divorce risk

Arizona is a community property state. Property acquired during marriage is generally community property (A.R.S. § 25-211), while certain property is separate (A.R.S. § 25-213). On divorce, community property is divided equitably (A.R.S. § 25-318), which can affect business interests. Consider spousal consents acknowledging transfer restrictions, separate-property planning when appropriate, buyout rights triggered by divorce or certain property awards, and insurance or reserves to fund required purchases.

Tax considerations

Structure affects tax outcomes. Cross-purchase arrangements may allow purchasing owners a basis step-up, while entity redemptions can have different corporate or partnership tax consequences. Insurance proceeds, installment sales, and valuation discounts also carry tax implications. Coordinate with tax advisors to align your agreement with your entity type (LLC taxed as partnership or S corporation, or C corporation) and owners’ goals.

Practical tips for Arizona owners

Documentation checklist

• Standalone buy-sell agreement or tailored provisions in your operating/shareholders’ agreement
• Insurance policies and collateral assignments
• Consents and waivers (including spousal consents)
• Valuation schedules or appraisal protocols
• Lender consents (if applicable)
• Board/member resolutions
• Updated cap tables, unit/share ledgers, and beneficiary designations

When to review and update

Update your agreement when ownership changes, valuation shifts materially, financing is added, tax laws change, or key owners experience life events. Periodic reviews help keep pricing, funding, and triggers realistic and enforceable.

FAQs

Do I need a separate buy-sell if my LLC has an operating agreement?

Not necessarily. Many LLCs embed buy-sell provisions in the operating agreement. Ensure those provisions are comprehensive, consistent, and updated.

How often should we update the valuation?

At least annually, and after major events such as new financing, a material revenue change, or an ownership change.

Can we restrict transfers to spouses or family trusts?

Yes, if the governing documents state permitted transferees and any required consents. In Arizona, transfer restrictions are generally enforceable when properly documented.

What happens if we do not have disability insurance?

You can still structure a buyout using reserves, seller financing, or third-party debt, but the risk of cash strain increases.

Does Arizona’s community property law give my spouse ownership in my business?

It can affect economic rights in interests acquired during marriage. Use spousal consents and clear agreement terms to manage the risk.

Getting started in Arizona

Gather your governing documents, cap table, and any insurance. Identify your preferred structure, triggers, and valuation approach. We can draft or refresh a buy-sell tailored to Arizona law, coordinate with your tax and insurance advisors, and help you implement funding and administration.

Ready to protect your business? Talk to an Arizona business attorney.

Key Arizona sources

• A.R.S. § 10-627 (Restrictions on transfer of shares and other securities)
• A.R.S. § 29-3105 (Operating agreement; scope and limitations)
• A.R.S. § 29-3502 (Transfer of transferable interest; effect)
• A.R.S. § 25-211 (Community property; general rule)
• A.R.S. § 25-213 (Separate property)
• A.R.S. § 25-318 (Disposition of property on dissolution)

Disclaimer: This post provides general information for Arizona matters and is not legal or tax advice. Reading it does not create an attorney-client relationship. Laws change and outcomes depend on specific facts. Consult an Arizona attorney about your situation.