Two Owners, No Tie-Breaker: The Buy-Sell Agreement Every 50/50 Business Needs

A 50/50 split can feel fair on day one: two founders, equal say, equal stake, and a shared plan. The pressure point is the first major disagreement neither owner can resolve. With no tie-breaker, one unresolved decision can stall the business.

A buy-sell agreement is a plan made before that happens. It can establish what happens if an owner dies, leaves, becomes unable to participate, breaches agreed obligations, or reaches a genuine deadlock with the other owner. It can also identify a valuation process, payment terms, and a dispute-resolution path before a personal or business conflict makes those questions harder to answer.

What a buy-sell agreement does

A buy-sell agreement—sometimes called a buyout agreement—sets rules for a transfer of an owner’s interest. For an LLC, the terms may appear in the operating agreement or in a separate agreement among the members. For a corporation, they may be addressed in a shareholders’ agreement or separate buy-sell agreement.

A carefully tailored agreement can address questions such as:

• Who may buy an owner’s interest, and who may be required to sell;
• Which events trigger a possible or mandatory purchase;
• How the interest will be valued;
• Whether the price is paid at closing or over time; and
• How a 50/50 deadlock moves toward a decision or an orderly separation.

Without an agreement, the business is left to its governing documents and applicable default law. Those rules can vary with the entity type, the state of formation, and the facts of the dispute. A court proceeding may be available in some circumstances, but it may not provide a quick or owner-controlled solution.

The events that can trigger a buyout

Buy-sell provisions are often organized around several potential triggering events, sometimes described as the “five Ds,” along with deadlock:

• Death: The agreement may provide a process for purchasing a deceased owner’s interest rather than leaving the remaining owner to work with the estate or heirs.
• Disability: The agreement can define the level and duration of an owner’s inability to perform before a buyout process begins.
• Divorce: The agreement can limit transfers and establish procedures if a divorce affects an owner’s economic interest.
• Departure: The agreement can address a resignation, retirement, or other voluntary departure.
• Default: The agreement can specify consequences for defined events, such as a material breach or certain insolvency-related events.
• Deadlock: The agreement can define the decisions that qualify, the steps required before a forced resolution, and the available resolution mechanism.

For 50/50 owners, the deadlock provisions deserve special attention. Equal voting power can make a decision impossible when the owners disagree on a matter that requires their joint approval.

Deadlock-breakers: the provisions 50/50 owners should not skip

A deadlock clause should not simply say that the owners will “work it out.” It should identify a process that applies if specified efforts fail. Common approaches include the following.

Buy-sell or “shotgun” clause

Under one version of a shotgun clause, one owner offers a stated price for the business or the other owner’s interest. The recipient then elects either to buy at that price or to sell at that price. The mechanism can encourage a fair price because the initiating owner may end up on either side of the transaction.

It can also create a practical imbalance if one owner has substantially greater access to cash or financing. The agreement should address notice, pricing, financing, closing, and what happens if the recipient cannot timely elect or close.

Put and call rights

A put can give an owner the right to require a purchase of that owner’s interest. A call can give the company or another owner the right to require an exiting owner to sell. The agreement should specify the triggering event, valuation process, payment structure, and timing.

Cooling-off period and private dispute resolution

An agreement can require a defined negotiation period, followed by mediation or arbitration if the owners cannot resolve the issue. These procedures may give the owners a more private and contract-based forum than litigation, but the cost and effectiveness depend on the clause and the dispute.

A designated tie-breaker

Some businesses appoint a neutral director, manager, or advisor to decide defined categories of issues. This option can resolve a limited operational impasse without requiring either owner to exit the business.

The right mechanism depends on the owners’ relative bargaining power, financing capacity, business model, and likely sources of disagreement. A provision copied from a form may not fit the business it is supposed to protect.

How the price gets set

A buyout process needs a workable valuation method. Common approaches include:

• A fixed price that the owners review on a stated schedule;
• A formula based on stated financial measures, such as revenue, earnings, or book value;
• An appraisal by an independent appraiser, sometimes using a multi-appraiser process; or
• A hybrid method that uses an agreed figure unless it has become stale, then moves to appraisal.

Each method has tradeoffs. A fixed price may be straightforward but can become outdated. A formula may be predictable but may not reflect current market conditions. An appraisal may be more tailored to the business but can take time and generate valuation disputes. The agreement should be clear about the valuation date, applicable discounts or premiums, appraisal qualifications, information access, cost allocation, and the procedure if appraisers disagree.

How the buyout gets funded

An agreed value does not itself create the money needed to complete a buyout. The agreement should identify the intended funding approach and what happens if the available funding is not enough. Potential approaches include cash reserves, an installment note with negotiated interest and security terms, third-party financing, and life or disability insurance for specified triggering events.

Insurance-funded buyouts require particular care. Two commonly used structures are:

• Cross-purchase: Owners hold policies on one another and use the death benefit to purchase the deceased owner’s interest directly.
• Entity redemption: The business owns the policies and uses proceeds to redeem the deceased owner’s interest.

The structure can carry material estate-tax and business-planning consequences. In Connelly v. United States, decided June 6, 2024, the U.S. Supreme Court held that life-insurance proceeds payable to a corporation were included when valuing a deceased shareholder’s shares for federal estate-tax purposes. In that case, the corporation’s obligation to redeem the shares at fair market value did not offset the value of the insurance proceeds.

The Court also explained that a cross-purchase structure would have avoided the particular risk presented there because the proceeds would have been paid to the surviving owner rather than to the corporation. That does not make cross-purchase the right answer in every situation: insurance ownership, premium obligations, transfer restrictions, tax consequences, and the owners’ broader succession plan all require individualized legal and tax review.

What can happen without a buy-sell agreement

When 50/50 owners reach an impasse without a buy-sell agreement, the governing documents and applicable state law become especially important. Depending on the entity type, jurisdiction, and facts, a member or owner may seek judicial dissolution or winding up. That process can place core business decisions, continued operations, and exit timing into a court-supervised process.

The remedies are not the same in every state:

• Arizona LLCs: Deadlock may support judicial dissolution only when statutory conditions are met, including circumstances where the deadlock is causing or threatening irreparable injury or preventing the business from being conducted to the members’ advantage. Arizona law also permits the court to order a remedy other than dissolution in a proceeding based on deadlock. A.R.S. § 29-3701
• California LLCs: A manager or member may seek judicial dissolution when management is deadlocked or subject to internal dissension, among other grounds. In a dissolution action, other members may elect to purchase the moving member’s interests for cash at fair market value; if value is disputed, the statute provides a court-administered valuation process. California Corporations Code § 17707.03
• Texas LLCs: A court may order winding up and termination when statutory conditions are established, including that it is not reasonably practicable to carry on the business in conformity with the governing documents. Texas Business Organizations Code § 11.314

These statutes are not a substitute for reviewing the governing documents or obtaining advice about a specific dispute. They also do not mean that a court will automatically require one 50/50 owner to buy out the other. A court-ordered buyout is not a general deadlock remedy across all entity types and states.

The best time to make the agreement

A buy-sell agreement is often easier to negotiate while the owners still agree on the business’s direction. Once a dispute is underway, the owners may have sharply different views about value, control, timing, and who should remain in the business.

At formation—or during a stable period—owners can decide what a fair process looks like before they know which side of a future buyout they may occupy. That is the point of the agreement: a defined path for an event that no one expects, but both owners should plan for. If you are weighing how to structure ownership in the first place, our guides to the founders’ agreement and choosing between a partnership and an LLC are useful companions.

Sources

• Connelly v. United States, 602 U.S. ___ (2024) — U.S. Supreme Court opinion (decided June 6, 2024)
• A.R.S. § 29-3701 (Arizona LLC judicial dissolution)
• Cal. Corp. Code § 17707.03 (California LLC dissolution & member buyout election)
• Tex. Bus. Orgs. Code § 11.314 (Texas winding up and termination)

Disclaimer

This article provides general information about buy-sell agreements and business-ownership disputes. It is not legal advice and does not create an attorney-client relationship. The right structure, valuation method, deadlock provisions, and available remedies depend on the entity type, the governing documents, applicable state law, and the facts of a particular business, and the law can change.