Buy-Sell Agreement Drafting Checklist: A Practical Checklist

Summary. A buy-sell agreement fails in a small number of predictable ways: a stale price, an appraisal procedure that can deadlock, a chain of options with no mandatory purchaser, and insurance nobody maintained. This checklist is organized to catch each at drafting, and to establish the maintenance discipline that keeps the agreement usable years later when it is finally needed. It covers structure, the full range of triggering events, the valuation mechanism and the discount question that generates most of the litigation, funding through insurance and notes, the surrounding governance terms, and the entity-specific provisions.

What this checklist is for. Drafting or reviewing a buy-sell agreement for a closely held business. For the reasoning behind each choice, see Buy-Sell Agreements and Business Valuation.

Phase 1 — Structure

Choose among cross-purchase, redemption, and hybrid (wait-and-see), and record why.
If hybrid, confirm the sequence: company option, then remaining owners' option, then a mandatory obligation on one or the other.
Confirm a mandatory purchaser exists. A chain of options ending in nobody is the single most common structural defect.
Confirm the structure is consistent with the entity's credit agreement, which typically restricts redemptions and requires lender consent.
Confirm state-law limits on redemption — surplus, solvency, and the personal liability of directors who approve an unlawful distribution.
Model the basis consequences: a cross-purchase gives the buying owners basis; a redemption does not.
For a C corporation redemption, analyze IRC § 302 and family attribution under § 318, and whether a § 302(c)(2) waiver is needed and available.
For a partnership or LLC, analyze IRC § 736 and whether payments are for the interest or are deductible guaranteed payments.

Why this matters. The structure determines who has cash, who gets basis, and whether the transaction is even permitted by the lender and the state statute. Every downstream term assumes an answer here.

Phase 2 — Triggering events

For each, specify whether the purchase is mandatory or optional, who buys, and the price mechanism.

Death — mandatory in nearly all cases, with a short delay to allow receipt of insurance proceeds.
Disability — with a definition, a waiting period, a determination procedure naming who selects the physician and how a disagreement resolves, and treatment of partial or intermittent disability.
Retirement or voluntary withdrawal — usually an option, with notice and an extended payment term.
Termination of employment, distinguishing for cause, without cause, and resignation, with a defined and objective "cause."
Divorce — requiring the owner to acquire any interest awarded to a spouse, with a company or owner backstop.
Bankruptcy, insolvency, assignment for the benefit of creditors, or a charging order.
Attempted voluntary transfer — a right of first refusal with a defined matching period and treatment of non-cash consideration.
Loss of a professional license, mandatory where a professional entity statute requires it.
Deadlock, with the chosen mechanism and its safeguards.
Change of control of an entity owner.
Death or divorce of a spouse holding a community property interest, in community property states.

Why this matters. Silence on any one of these is where litigation comes from, and the omitted trigger is nearly always the one that happens.

Phase 3 — Valuation

Choose the mechanism: fixed price with periodic revaluation, formula, appraisal, or a combination.
If a fixed price, include an automatic fallback to appraisal if the certificate is older than a stated period.
If a formula, define every term — which earnings measure, which addbacks, whose accounting, which period, how owner compensation is normalized, and the treatment of debt, cash, working capital, and non-operating assets.
Consider a collar: the formula price subject to an appraisal floor and ceiling, or a right to demand appraisal on a stated deviation.
State the standard of value — fair market value or fair value — and understand the difference.
State expressly whether minority and marketability discounts apply, and consider applying them differently by trigger (none on death and disability; a discount on voluntary withdrawal).
Specify appraiser qualifications and disqualify anyone who has worked for the company or an owner within a stated period.
Specify a deadlock-proof procedure: a single jointly retained appraiser, or three appraisers with the average of the two closest, or baseball arbitration in which the third appraiser must select one of the two submitted values.
Specify the valuation date and whether post-date events are considered.
Specify who pays for the appraisal.
State expressly how life insurance proceeds are treated in the agreement price.

Why this matters. "Fair market value as determined by an appraiser mutually agreed upon" is a sentence that can deadlock before it starts and that leaves the discount question — frequently a third of the price — entirely open.

Phase 4 — Funding

Life insurance sized to the price mechanism, with ownership and beneficiary designations that match the structure.
Assign responsibility for premium payment and monitoring to a named officer, with an annual certification to the board that policies are in force.
Address insurability — what happens when an owner cannot obtain coverage.
Address policy transfers on an owner's departure, with attention to the transfer-for-value rule under IRC § 101(a)(2).
Evaluate the estate tax consequence of entity-owned insurance after Connelly v. United States, 602 U.S. 257 (2024), and consider a cross-purchase, an insurance LLC, or a trust.
Consider disability buy-out insurance, which is rarely purchased and covers a more likely event.
For amounts not insured: an installment note with a stated term, interest at least at the applicable federal rate, acceleration on default, security, subordination to the senior lender, and covenants limiting distributions, compensation, and new debt while outstanding.
Consider a sinking fund or a reserve requirement.

Why this matters. An unfunded agreement is a promise. Lapsed or mismatched insurance is the most common single failure, and it is discovered at the funeral.

Phase 5 — Surrounding terms

Transfer restrictions, with the restriction noted conspicuously on certificates or in the notice for uncertificated shares, so it binds transferees.
Tag-along rights for minority owners on a controlling sale.
Drag-along rights, with protections: same price and form of consideration, fundamental representations only, liability capped at proceeds and several rather than joint, and no imposed non-compete.
Preemptive rights on new issuances.
Information rights — annual financials, tax information sufficient to file, and inspection.
Mandatory tax distributions in a pass-through entity, at a stated rate.
Non-competition and non-solicitation tied to ownership, evaluated under the sale-of-business standard.
Dispute resolution — mediation, then arbitration or a designated court, with a carve-out for injunctive relief.
Governance: board seats, supermajority or veto rights over defined major decisions, and officer appointment.
Spousal consent, signed at execution and re-executed when owners marry.
Amendment requiring a supermajority or unanimity for the transfer and valuation provisions specifically.
Notices, governing law, counterparts, and electronic signature provisions.

Phase 6 — Entity-specific

Corporation

Confirm the restriction is authorized by the state's corporate statute.
Confirm the certificate legend complies with UCC § 8-204.
If an S corporation: prohibit transfers to ineligible holders, prohibit any arrangement creating a second class of stock, and confirm the agreement's price and payment terms do not themselves create one.

LLC

Confirm the operating agreement's amendment provision protects the buy-sell terms.
Distinguish transfer of an economic interest from admission as a member.
Address capital account treatment and whether § 736 applies.

Professional entity

Mandatory transfer on loss of license, within the statutory window.
Address personal versus enterprise goodwill in the valuation.
Pair with covenants converting personal goodwill into retained enterprise value.

Family business

Analyze IRC § 2703: bona fide business arrangement, not a device, and comparable to arm's-length arrangements — with contemporaneous documentation of each.
Confirm the agreement binds owners during life as well as at death.
Coordinate with the estate plan, including any grantor trust, GRAT, or sale to a defective trust.
Consider IRC § 2704 where lapsing rights or restrictions are involved.

Phase 7 — Maintenance

Annually: certify or refresh the value; confirm insurance in force with a carrier statement; confirm beneficiary designations; confirm spousal consents cover current spouses.
On any ownership change: amend the schedule of owners, join the new owner as a party, and issue or reissue certificates with the legend.
On any material transaction: check the credit agreement, any new investor's rights, and the equity plan for conflicts.
Every three to five years, or on a change in tax law: a full legal and tax review.
When an owner reaches sixty or receives a diagnosis: review immediately, recognizing that amendments made then face both § 2703 scrutiny and skepticism from co-owners.

Common mistakes

A stale fixed price with no fallback.
"Fair market value" with no statement about discounts.
An appraisal procedure that can deadlock before it begins.
Options all the way down, with no mandatory purchaser.
Lapsed insurance, or ownership and beneficiary designations that do not match the structure.
No disability definition, or one requiring the disabled owner's cooperation.
No spousal consent and no divorce trigger.
Payment terms the company cannot survive — a lump sum with no financing and no subordination.
The senior lender never consulted, and it will not consent.
Never updated after the business, the ownership, or the tax law changed.

Primary authority

Tax: IRC § 2703 and Treas. Reg. § 25.2703-1; IRC § 302 and § 318; IRC § 736; IRC § 101; Revenue Ruling 59-60.
Cases: Connelly v. United States, 602 U.S. 257 (2024); Estate of True v. Commissioner, 390 F.3d 1210 (10th Cir. 2004); St. Louis County Bank v. United States, 674 F.2d 1207 (8th Cir. 1982).
State law: the applicable business corporation act or LLC act on transfer restrictions and distributions; UCC § 8-204.

This checklist is educational and not legal advice. Buy-sell agreements involve state corporate law, contract law, insurance, and federal tax rules that change and that apply differently to each entity type and family situation. Consult qualified corporate and tax counsel before drafting, funding, or amending an agreement.