Operating Agreements and Push Pull Provisions/Buy Sell Provisions

By - April 14, 2025 - Uncategorized

In a business partnership, having an operating agreement is crucial to ensuring all members understand each other’s responsibilities. Within the agreement, push pull provisions and buy sell provisions provide details about how specific circumstances will be handled, such as if a partner leaves the business or if two partners have a disagreement. Let’s take a closer look at how these provisions work and what you should consider when creating agreements.

Why Is an Operating Agreement So Important?

Operating agreements guide the internal operations of business partnerships and limited liability companies (LLCs). The agreement describes each partner’s role, outlines financial arrangements, and establishes protocols for making decisions. Key provisions include those related to each person’s financial contributions, the transfer of ownership, management and decision making, dispute resolution, profit and loss distribution, and push/pull and buy/sell provisions. The agreement is an important document that can benefit companies of all sizes, providing partners with clarity around how the business will be run and how to handle unexpected events.

What Are Buy-Sell Provisions?

A buy-sell provision is a document that details when and how a business partner’s interest in the company can be bought or sold. This contract helps the transition of ownership go smoothly and helps ensure that the transaction is fair to everyone involved. When writing a buy-sell agreement, consider including the following components:

• Eligible buyers: Who can purchase the departing partner’s interest? For example, remaining partners, the business entity, or third parties.
• Triggering events: Under what circumstances can a purchase or sale take place?
• Pricing mechanisms: What is the valuation process for the departing partner’s interest? For example, fair market value appraisal, formula-based appraisal, or a fixed price.
• Funding methods: How will the buyout be financed?
• Payment terms: When and how will payments be made?
• Dispute resolution: What is the process for resolving disagreements?

The provision should be customized to the unique needs of the business. A business attorney can help ensure you include all necessary components.

Trigger Events in Buy-Sell Agreements

A trigger event is an incident that initiates the transfer of ownership as outlined in the buy sell agreement. These trigger events, in which a partner’s interest in the business can be bought or sold, often include:

• Death or disability: The affected partner’s share is sold and they or their heirs receive compensation.
• Retirement or voluntary exit: This helps minimize disruptions to business operations when partners retire or leave the company.
• Irreconcilable disputes: When partners can’t come to an agreement on an issue, the buy sell provision outlines the process for resolving disputes and, if needed, transferring ownership.
• Bankruptcy or divorce: The agreement protects the existing business structure and helps prevent creditors or spouses from interfering with the business.

Types of Buy-Sell Agreement Structures

There are a variety of ways in which a buy-sell agreement can be structured. One common structure is a cross-purchase agreement. In this structure, the remaining partners buy the departing partner’s share. Cross-purchase agreements tend to be used by small businesses that don’t have many partners.

Another common structure is an entity-purchase agreement, also called a stock redemption agreement. In this agreement, the business entity, rather than individual partners, buy the departing partner’s share. Entity-purchase agreements are often used by larger companies or corporations.

Valuation and Funding Options

How do you determine the value of a departing partner’s share in the company? There are a few different methods to choose from. A fair market value appraisal uses an independent expert to determine the value. A formula-based appraisal uses a formula to determine the value. In a fixed price agreement, the partners agree on a price. Financing a buyout can be challenging, so businesses may turn to installment payments, business reserves, or life insurance policies to pay for the buyout.

What Are Push-Pull Provisions?

A push-pull provision is used to help partners in a deadlock come to a resolution. One of the partners can offer to buy out the other partner’s interest in the company at a specific price. The other person can either accept the offer and sell their share, or buy the initiating partner’s interest at the same price.

Since the person initiating the transaction must set a price they’d also be willing to accept themselves, push-pull provisions help ensure fairness during buyouts. These provisions are especially effective for businesses in which owners have equal interest in the business.

How Push/Pull Clauses Work

A push-pull clause follows a step-by-step process.

1. Triggering event: Partners come to a deadlock and fail to resolve a dispute through discussion or mediation.
2. Offer submission: One person initiates the push pull clause by proposing a buyout price
3. Response: The person who receives the offer can either agree to sell their share in the company, or purchase the initiating person’s share at the proposed price. There is no room for negotiation at this step.
4. Transaction execution: The buyout takes place in line with the agreed-upon terms. Payment arrangements are finalized, business records are updated, and the business is transferred from one person to the other.

A business attorney can help ensure the push pull clause is carried out in compliance with any legal requirements or tax requirements.

Avoiding Common Pitfalls in Business Partnership Agreements

Being thoughtful when drafting an agreement for business operations, including buy sell and push pull clauses, can help you create an agreement that is well-defined, effective, and meets your business needs. First, be sure to use terms that are clear and easy to understand. Vague or ambiguous terms can lead to confusion and disagreements. It’s also important to update the agreement as the business grows or changes over time. This helps ensure the agreement remains effective and accurately reflects the company’s current goals, finances, and structure. Additionally, pay attention to how you’re structuring the buyout and the tax implications that a specific structure can have. Look into how capital gains taxes, corporate taxes, and estate taxes may impact the buyout.

When a business has more than one owner, it’s important to have the right contracts in place to make sure all partners understand their roles and can effectively handle disagreements. When you want to create an agreement covering business operations and the transfer of shares, seek assistance from an attorney experienced in business law. They can help businesses identify risks, stay compliant with applicable laws, and customize documents to fit your business’s specific needs.

The experienced team at Stevens Law Firm in Columbus, Ohio is ready to help. Contact us today to schedule your free consultation.