Buy-Sell Agreements in Oklahoma

Two brothers own a building supply company. They sign an agreement so the business stays in the family if either one dies, and the company buys life insurance to fund the buyout. One brother dies. The company collects the insurance and uses three million dollars of it to buy his shares from his estate.

Then the IRS values those same shares at five point three million, because the insurance money the company received counted as a company asset and the obligation to spend it didn’t offset that. The estate owed tax on value it never saw. In June 2024 the Supreme Court agreed with the IRS, unanimously.

That case is why every Oklahoma business with more than one owner should look at its buyout arrangement again. But the more common problem is simpler and worse: many Oklahoma companies with several owners have no buy and sell agreement (often written “buy-sell agreement”) at all. They have an operating agreement that covers voting and distributions, and nothing that answers what happens when one of the owners dies, gets divorced, files bankruptcy, becomes disabled, or simply wants out.

This guide covers what a buy and sell agreement does, the three structures and when each one fits, how the 2024 ruling changed the funding math, the trigger events most agreements miss, what makes a valuation provision hold up, and the Oklahoma specific issues that shape all of it.

Table of Contents

• What a Buy and Sell Agreement Actually Does
• What Happens in Oklahoma With No Agreement
• The Three Structures and When Each Fits
• Connelly Changed the Math on Redemption Agreements
• Does the $15 Million Exemption Make Connelly Moot?
• Trigger Events Most Agreements Get Wrong
• Valuation: Formula, Appraisal, or Fixed Price
• Section 2703: When the IRS Ignores Your Price
• Funding the Buyout
• Deadlock and the Shotgun Clause
• Oklahoma Specific Considerations
• How This Fits With Your Operating Agreement
• Common Mistakes
• Getting Started
• Frequently Asked Questions

What a Buy and Sell Agreement Actually Does

A buy and sell agreement answers three questions in advance, at a moment when all the owners are still healthy, still speaking to each other, and still reasonably objective:

1. What events force or permit a buyout? Death, disability, divorce, bankruptcy, retirement, termination, deadlock, or a voluntary exit.
2. Who buys, and at what price? The company, the remaining owners, or some combination, using a defined valuation method.
3. Where does the money come from, and over what period? Insurance, cash reserves, a promissory note, bank financing, or some mix.

The value is entirely in deciding these things early. When a buyout is actually triggered, the parties’ interests are opposed by definition. The departing owner or their estate wants the highest number; the remaining owners want the lowest and the longest payment terms. Negotiating valuation at that moment, with no agreed procedure, is how families end up in litigation with each other. When there’s no agreement in place, our guide to partner buyouts in Oklahoma covers how the price and terms get worked out.

The agreement can live inside your operating agreement or stand alone. Either works, but they have to be consistent. A standalone buy and sell agreement that conflicts with the transfer provisions in your LLC operating agreement creates exactly the ambiguity it was supposed to prevent.

What Happens in Oklahoma With No Agreement

Without a buyout provision, the default rules apply, and the defaults weren’t written with your business in mind. Our guide to what happens when an LLC owner dies in Oklahoma explains those defaults for a member’s death. Our Oklahoma business planning attorneys draft buy and sell agreements that fit the way your company is actually owned and funded.

On an Owner’s Death

The ownership interest passes through the deceased owner’s estate under their will, or under Oklahoma’s intestate succession statute if there’s no will. The practical result is that you acquire new owners: a surviving spouse, adult children, or in some cases a probate estate that will sit in your cap table for months while the process runs. In an LLC, Oklahoma’s default gives heirs the economic rights but not a vote unless the operating agreement or the other members admit them, which limits their say but doesn’t buy them out.

Those new owners may have no experience in the business, no interest in it, and expectations about distributions that don’t match how the company actually operates. They may also want out immediately and have no mechanism to get out, which puts pressure on the company to fund a buyout it never planned for. Our guides on dying without a will in Oklahoma and how long probate takes cover the process side.

On Divorce

A divorcing owner’s interest is potentially subject to division. Even where the operating agreement restricts transfers, a divorce court has tools to allocate value, and the practical outcome can be a former spouse holding an economic interest in your company or the owner being forced to liquidate to fund a settlement.

On Disability or Withdrawal

Nothing requires the company to buy anyone out. An owner who can no longer work may continue holding their full interest and receiving distributions indefinitely while contributing nothing, and the remaining owners have no way to change it. Conversely, an owner who wants out may find there’s no buyer and no exit, which is the problem our guide to exiting an LLC addresses in depth.

On Deadlock

With two fifty percent owners and no tiebreaker, a disagreement on any matter requiring majority consent can freeze the company. The main remaining options are more negotiation, which has already failed by definition, or a court case seeking judicial dissolution, which is expensive and rarely produces an outcome either side wanted.

The Three Structures and When Each Fits

Nearly every buyout arrangement takes one of three forms, and the choice drives tax treatment, funding mechanics, and now estate tax valuation.

Redemption (Entity Purchase)

The company itself buys the departing owner’s interest. One insurance policy per owner, owned and paid for by the company. Administratively the simplest structure, especially with more than two or three owners, because it needs one policy per owner, while a cross purchase needs far more as owners are added.

This is the structure the Supreme Court addressed in 2024, and the structure whose estate tax consequences changed. More on that below.

Cross Purchase

The remaining owners buy the departing owner’s interest individually. Each owner holds a policy on each other owner. The buyers get a new basis equal to what they paid for the interests they acquire, which can matter a great deal on a later sale of the company.

The drawback is policy count. Two owners need two policies. Four owners need twelve. Six owners need thirty. It also creates uneven cost when owners differ substantially in age or health, because each owner is paying premiums on the others.

Hybrid

The agreement gives the company a first option to redeem and the remaining owners a second option, or the reverse, with the other party obligated if the first declines. This preserves flexibility to choose the better structure based on circumstances at the time, including tax circumstances that may have changed since signing.

A hybrid is often a good fit for a business with three or more owners that wants redemption’s administrative simplicity without permanently forfeiting the cross purchase basis advantage. It’s also more complex to draft and requires disciplined attention to the notice and election mechanics.

Connelly Changed the Math on Redemption Agreements

On June 6, 2024, the Supreme Court decided Connelly v. United States unanimously. The facts are ordinary enough that most closely held businesses will recognize themselves in them.

Two brothers owned a building supply corporation. Their agreement gave the surviving brother an option to buy the deceased brother’s shares, and if he declined, obligated the corporation to redeem them. The corporation held $3.5 million of life insurance on each brother to fund that obligation. When one brother died, the survivor declined, the corporation collected the insurance, and it paid the estate three million dollars for the shares.

The estate reported the shares at that three million figure, reasoning that the insurance proceeds were offset by the corporation’s obligation to spend them on the redemption. That reasoning had support in an earlier federal appeals court decision, Estate of Blount. The IRS disagreed. Everyone in the case agreed the insurance proceeds were a corporate asset included in the company’s value at the date of death. The question was whether the obligation to redeem the shares offset them, and the Court held that it did not. The IRS valued the company at $6.86 million, which put the estate’s 77.18 percent stake at about $5.3 million and produced $889,914 in additional estate tax. You can read the opinion itself, the syllabus and opinion on Cornell’s Legal Information Institute, or the AICPA Tax Adviser’s summary of the decision.

Why the Court Reached That Result

The reasoning turns on what a hypothetical buyer would have paid for the shares on the date of death. As the Court put it, a redemption at fair market value doesn’t change any shareholder’s economic interest: the departing owner’s shares are paid out at their value, and the remaining owners hold the same value they held before. So a buyer would count the insurance money as a company asset, and the obligation to spend it on the redemption isn’t a liability that offsets it. In a footnote, the Court said it wasn’t holding that a redemption obligation can never reduce a company’s value, for example where paying it means selling operating assets.

The Operational Detail That Mattered

Here’s the part many summaries skip, and the part most relevant to Oklahoma owners. The Connelly agreement called for the brothers to agree on the share price each year by signing a certificate of agreed value, and for an outside appraisal if they didn’t. As Fifth Third’s review of the case notes, they never signed any annual certificates, and the opinion shows they never got the appraisal either. When the death occurred, there was no contemporaneous agreed value to point to, and the price was set after the fact by the surviving brother and the decedent’s son.

As the Court noted, an agreement like this one may set out how to price the shares, but it is ordinarily not dispositive for estate tax purposes. Under Section 2703 the agreement’s price counts only if specific conditions are met, and agreements among family members get heightened scrutiny (more on that below). An agreement whose own procedures were ignored for years is a weak foundation on which to argue the price was arm’s length.

What To Do About It

• Identify whether you have a redemption structure funded by company owned insurance. If so, you’re in the fact pattern. The case involved a corporation, but owners of LLCs that fund a redemption with company owned insurance shouldn’t assume they’re outside its reasoning.
• Consider whether a cross purchase or hybrid fits better. Policies owned by the individual owners, or by an insurance LLC, aren’t company assets. The Court itself said a cross purchase would have avoided the problem, while noting drawbacks such as the risk that one owner can’t keep paying the premiums on the other’s policy.
• Actually follow your own valuation procedure. If the agreement says value annually, value annually, in writing, and keep the records.
• Do not restructure reflexively. Transferring existing policies has its own tax consequences, including the transfer for value rule discussed under funding below, which can make death benefits taxable. This is a coordinated decision among counsel, CPA, and insurance advisor.

Does the $15 Million Exemption Make Connelly Moot?

This question gets less attention than it deserves, and the honest answer is more useful than the alarm.

Much of the commentary written in 2024 assumed the federal estate tax exemption was about to fall by roughly half, because the increase in the 2017 tax law was scheduled to expire after 2025. Under that assumption, Connelly threatened to pull a large number of ordinary closely held businesses into estate tax exposure.

That drop didn’t happen. The federal tax law signed July 4, 2025, commonly called the One Big Beautiful Bill Act, set the estate and gift tax exemption at fifteen million dollars per person for 2026, or up to thirty million for a married couple using portability, with inflation adjustments resuming in 2027 and no scheduled expiration date. The IRS’s what’s new page for estate and gift tax lists $15,000,000 for 2026 deaths, up from $13,990,000 for 2025, and the AICPA’s Tax Adviser confirms that inflation adjustments based on that figure resume in 2027. Congress can still change it later, but as CRI’s overview of estate and gift tax planning after the OBBBA shows, today’s rules differ sharply from what the 2024 Connelly commentary assumed.

So for most Oklahoma business owners, Connelly won’t produce a federal estate tax bill, because their estates are well under the exemption. Treating it as an emergency for every company overstates the risk.

Where It Still Matters

• Businesses that are already large, or growing toward the threshold. A company worth eight million today with company owned insurance of three million is closer to the line than its owners assume, and the exemption is measured against the whole estate, not just the business.
• Owners without a surviving spouse, or without a portability election. A surviving spouse can use the unused part of the first spouse’s exemption only if the estate elects portability on a timely filed federal estate tax return, and the IRS’s estate tax FAQs describe a simplified late election only for estates that weren’t otherwise required to file, within five years of the death. Estates that skip the filing can lose the unused exemption.
• The valuation principle itself. Connelly is a case about how you value a closely held interest. That question recurs in divorce, in owner disputes, in charitable gifts, in gift tax planning, and in any buyout where the price is contested.
• Everything that isn’t a tax problem. A redemption structure with an unfollowed valuation provision creates fights among the living regardless of whether any tax is owed.

Trigger Events Most Agreements Get Wrong

Death is in every agreement. The others are where the gaps appear.

The Standard Set

• Death. Mandatory purchase is typical, since nobody wants an involuntary partnership with an estate.
• Disability. Requires an actual definition. How long does an inability to work continue before it triggers? Who decides, and on what evidence? Many agreements say “disability” and define nothing, which guarantees a dispute at the worst moment.
• Retirement or voluntary withdrawal. Usually with notice requirements and often with a longer payment period, since a voluntary exit shouldn’t be allowed to drain the company.
• Termination of employment. Critical where owners are also employees. Should a terminated owner keep their equity? Should the price differ for cause versus without cause? These are negotiable and should be negotiated.

The Ones Commonly Missed

• Divorce. A provision requiring an owner whose interest becomes subject to division to first offer it to the company or the other owners. Spousal consents, signed at the outset, make this far more durable.
• Bankruptcy or creditor action. Without a trigger, a creditor or trustee can end up holding an economic interest in your company. Under Oklahoma law, a judgment creditor’s exclusive remedy against an LLC member’s interest is a charging order, which gives the creditor only an assignee’s economic rights. Federal bankruptcy law can also override transfer restrictions and bankruptcy triggers in some cases, so this trigger needs careful drafting.
• Loss of a required license. Meaningful in regulated and professional contexts where ownership itself may be restricted to licensed persons.
• Change of control of an entity owner. If one of your owners is an LLC or a trust, a change in who controls that entity is a change in who you’re in business with.
• Deadlock. Discussed below.
• Breach or misconduct. Including misappropriation of company information, which connects directly to the issues in our guide on Oklahoma trade secrets and departing employees.

Mandatory Versus Optional

For each trigger, decide whether the purchase is required or merely permitted, and by whom. A mandatory purchase gives the departing owner or their estate certainty of liquidity. An option gives the company flexibility to preserve cash. The right answer differs by trigger: death usually warrants a mandatory purchase, while voluntary withdrawal often warrants an option.

Valuation: Formula, Appraisal, or Fixed Price

Valuation is where buy and sell agreements most often fail, and the failures are predictable.

Fixed Price, Updated Periodically

The owners agree on a value and revisit it annually. Simple, cheap, and completely dependent on discipline. This is precisely the mechanism the Connelly brothers had and never used. If you choose this method, calendar it, document it in a signed consent, and treat a missed year as a real problem rather than an administrative oversight.

Formula

A multiple of EBITDA, a multiple of revenue, book value, or some blend. Predictable and inexpensive, and it produces absurd results at the edges. A formula set when the business had steady margins can badly misprice it after a bad year, a one time gain, or a change in the revenue mix. Formulas should specify the measurement period, the normalization adjustments, and how debt and cash are treated, and they should be revisited as the business changes.

Independent Appraisal

A qualified appraiser values the interest when the trigger occurs. Most likely to produce a defensible number and the most expensive and slowest. The agreement should name the qualifications required, the selection process, who pays, and a tiebreaker procedure where each side appoints an appraiser.

The Terms People Forget to Define

• Standard of value. Fair market value and fair value are different standards that produce different numbers.
• Discounts. Whether minority interest and lack of marketability discounts apply. These aren’t trivial adjustments. The IRS’s own job aid for its valuation staff on marketability discounts reviews studies whose average discounts range from about 13 percent to about 45 percent, with more recent studies generally lower, and it cautions that the right discount depends on the facts, so silence on this point is effectively a decision worth a large amount of money.
• Valuation date. Date of death, date of notice, or the last fiscal year end.
• Treatment of insurance proceeds. After Connelly, say explicitly whether proceeds count in the purchase price. If the price leaves them out while the estate tax value includes them, the estate can be taxed on value it never receives.

Section 2703: When the IRS Ignores Your Price

Setting a price in an agreement doesn’t automatically make it the price for tax purposes. Internal Revenue Code Section 2703, added in 1990, provides that restrictions and options on property are generally disregarded in determining fair market value for estate and gift tax purposes, unless the arrangement satisfies a three part exception.

The Three Requirements

1. Bona fide business arrangement. The agreement must serve a real business purpose, such as maintaining ownership continuity, not merely reduce transfer tax.
2. Not a device to transfer property to family below full and adequate consideration. The device test.
3. Terms comparable to arm’s length arrangements between unrelated parties. The comparability test.

Each of the three tests has to be met on its own, and the comparability test is often the hardest to satisfy, because owners rarely document that their chosen formula resembles what unrelated parties would have agreed to. A price that’s defensible commercially can still be disregarded if nobody can show it was arrived at on terms a stranger would accept.

The Family Control Threshold

Section 2703’s practical bite is concentrated in family controlled businesses. The regulations include a safe harbor under which a restriction is deemed to satisfy the requirements if more than half the value of the property subject to the restriction is owned by people who are not members of the transferor’s family, as long as those owners are bound by the restriction to the same extent. A business owned by genuinely unrelated partners is in a materially better position than a family business with the same document.

What This Means Practically

If your buy and sell agreement sets a value and your business is family controlled, the agreement has to satisfy the exception to be respected for estate and gift tax purposes. The older estate tax regulations add a related condition: a price gets little weight if the owner was free to sell at any price during life, so the agreement has to be binding during life as well as at death. Agreements that bind only at death, or that set a price the owners would never accept from a stranger, generally don’t qualify.

One historical note worth checking: agreements entered into before October 9, 1990 may be grandfathered from Section 2703 unless substantially modified, though the older estate tax regulation still applies to them. If you’re working from a genuinely old document, amending it may cost you that treatment, which is a reason to get advice before redlining.

Funding the Buyout

An unfunded buy and sell agreement is a promise the company may not be able to keep. Insurance companies write about this part constantly, and legal guides often skip it.

Life Insurance

The standard funding mechanism for death triggers, because it delivers liquidity precisely when it’s needed. The key questions are who owns the policy, who pays the premiums, and whether the coverage amount still matches the company’s current value. Coverage that was adequate when the agreement was signed can fall far short of the value five or ten years later, which is one reason Northwestern Mutual’s guide to funding a buy and sell agreement points to updating the valuation periodically as a way to track the business’s growth.

Post Connelly, ownership of the policy is a structural decision with tax consequences, not an administrative detail.

Company owned policies come with notice and consent rules. A policy the company owns on an owner who works in the business is employer owned life insurance under Section 101(j) of the Internal Revenue Code. The death benefit is fully income tax free only if two things are true. Before the policy was issued, the insured got written notice of the coverage and its maximum amount, consented in writing to the coverage and to its continuing after employment ends, and was told in writing that the company would be a beneficiary. And the case fits one of the statute’s exceptions, such as proceeds used to buy the insured’s interest from the heirs or estate. Without that paperwork, the company’s tax free amount can be limited to the premiums it paid. The company also reports its coverage each year on IRS Form 8925.

Cross purchase policies have a transfer for value trap. Life insurance proceeds are generally income tax free, but when a policy is transferred for value, the tax free amount can be limited to what the buyer paid plus later premiums. That can happen in a cross purchase among three or more owners, for example when a deceased owner’s estate sells the policies it held on the surviving owners to the other owners. The statute’s exceptions include transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer. Members of an LLC taxed as a partnership are generally partners for this purpose, but transfers between fellow shareholders of a corporation aren’t on that list, which is one reason some owners hold the policies in a separate insurance LLC taxed as a partnership. That structure has its own estate tax and drafting requirements, so it’s a decision for counsel, a CPA, and the insurance advisor together.

Disability Insurance

Commonly omitted, even though disability is more likely than death during working years. The Social Security Administration’s actuaries estimate that a 20 year old insured worker has about a 25 percent chance of becoming disabled before normal retirement age, compared with about a 13 percent chance of dying in that period. Disability buyout coverage exists specifically for this purpose and is worth pricing.

Company Reserves

Workable for smaller buyouts and rarely sufficient for a significant one. It also competes directly with working capital at the exact moment the company has lost an owner.

Promissory Note

The company or the buying owners pay over time, often over several years with interest. Frequently the realistic answer for triggers other than death. The agreement should address the interest rate, security, subordination to bank debt, acceleration on default, and whether the departing owner retains any rights until paid in full. A seller who’s effectively financing their own buyout with no security is in a weak position.

Bank Financing

Possible, and dependent on the company’s balance sheet after losing an owner. Lenders can be cautious about funding buyouts of key people. Discussing this with your lender before the agreement is signed is better than discovering the limits afterward.

Deadlock and the Shotgun Clause

For two owner and 50/50 companies, the deadlock mechanism is often the single most important provision in the document.

Common Approaches

• Mediation or arbitration. A mediator helps the owners settle the disputed issue, or an arbitrator decides it. Preserves the partnership but may not resolve an underlying breakdown in the relationship.
• Status quo with a preset adjustment. If the owners can’t agree on next year’s budget, last year’s budget continues with a fixed percentage increase. Useful for recurring operational disputes.
• Referral to a third party. An outside director, an advisory board, or a designated professional breaks the tie.
• Buyout triggered by deadlock. The disagreement itself becomes an exit trigger.

The Shotgun Clause

Sometimes called a Russian roulette clause. One owner names a price; the other must either buy at that price or sell at that price. The elegance is that it forces the offeror to name a genuinely fair number, since they don’t control which side of the transaction they end up on.

The elegance is also the danger. A shotgun clause systematically favors the owner with more liquidity, because an owner who can’t fund a purchase can only ever sell. In a business where one owner is wealthy and the other has everything tied up in the company, a shotgun provision is effectively a call option held by the wealthier owner. If you include one, consider funding requirements, a floor tied to an independent valuation, or a cooling off period.

Oklahoma Specific Considerations

Most of the rules above are federal tax rules that work the same way in every state. A handful of Oklahoma rules shape how a buy and sell agreement works here, and our Oklahoma business succession planning attorneys work through them with owners when they draft or review an agreement.

No Oklahoma Estate Tax

Oklahoma’s estate tax ended for deaths on or after January 1, 2010, as Public Radio Tulsa reported when the last step took effect, and Oklahoma has no inheritance tax. Oklahoma owners generally face only the federal estate tax. That’s a meaningful advantage over owners in the 16 states and the District of Columbia that impose their own estate or inheritance taxes, with estate tax exemptions as low as one million dollars in Oregon and inheritance taxes that can reach much smaller amounts for some heirs. For most Oklahoma business owners, the fifteen million dollar federal exemption is the main estate tax question (unless they also own real estate in a state with its own tax), which is why Connelly’s practical reach here is narrower than national commentary suggests. Our guide to Oklahoma inheritance and estate taxes covers the federal exemption, portability, and other states’ taxes.

Restrictive Covenants in the Buy and Sell Context

Buy and sell agreements routinely include covenants restricting the departing owner from competing. Under Oklahoma law, most employee noncompetes are void, but a separate rule applies to someone who sells the goodwill of a business: the seller may agree not to compete within a specified county and the counties that border it, or within a specified city or town, for as long as the buyer carries on a like business there. Whether an owner’s buyout counts as a sale of goodwill depends on the facts, including how large an interest the owner is selling. Drafting these to sit on the right side of that line matters, and our Oklahoma noncompete guide covers the statutory framework in detail.

Choosing a Forum for Disputes

Buyout valuation fights and deadlock disputes are where a clear dispute resolution clause pays for itself. Oklahoma lawmakers created specialized business courts in 2025, but the Oklahoma Supreme Court struck the law down that October, so these disputes are heard in ordinary district court unless your agreement says otherwise. Decide in advance whether disputes go to mediation, arbitration, or a named county, and whether an independent appraiser resolves valuation disagreements, particularly if an owner lives out of state. Our guide to Oklahoma LLC operating agreements covers the dispute resolution clause.

Transfer Restrictions on Corporate Shares

If your company is a corporation, the buy and sell terms usually live in a shareholders agreement, the bylaws, or both. Under Oklahoma law, a written restriction on transferring shares can be enforced against a later holder only if it’s noted conspicuously on the stock certificate (or in the required notice for shares without certificates), unless that person actually knew about it. Our guide to Oklahoma shareholder agreements covers the corporate side.

Family and Mineral Interests

Many Oklahoma closely held businesses are family owned, which puts them squarely inside Section 2703’s area of concern and inside the heightened scrutiny that applies to family agreements. Many also hold oil, gas, or mineral interests, which require their own valuation approach and may warrant separate treatment in the agreement rather than being folded into an EBITDA multiple. Our guide to succession planning for family businesses covers the generational dimension.

Community Property and Spousal Consents

Oklahoma isn’t a community property state. In a divorce, Oklahoma law confirms to each spouse the property he or she owned before the marriage and divides the property the couple acquired jointly during the marriage as may appear “just and reasonable,” which isn’t always an even split. Spousal consents remain worth obtaining anyway, because they put the spouse on notice of the transfer restrictions and reduce the argument later that they were never bound. They don’t stop a divorce court from awarding the other spouse value from other assets, but they help keep a former spouse from becoming an owner. This matters most if an owner lives in a community property state, moves to one, or acquired the interest while living in one.

How This Fits With Your Operating Agreement

A buyout provision doesn’t operate alone. It sits inside a set of transfer mechanics that need to be coherent. Our guide to LLC exits and transfer provisions covers each of these in depth; here’s how they connect to the buyout terms.

• General transfer restriction. The baseline prohibition on transferring an interest without consent or without following the specified procedures.
• Permitted transfers. Exceptions for transfers to family members, trusts, and controlled entities. Draft these carefully, because a broad permitted transfer provision can swallow the restriction it sits inside.
• Right of first refusal or right of first offer. A first refusal applies after the selling owner has a third party offer in hand. A first offer requires them to come to the other owners first, before shopping the interest. Including both is generally impractical, since the procedures are lengthy and accomplish the same goal.
• Tag along rights. Protect minority owners by letting them participate pro rata when a controlling owner sells.
• Drag along rights. Protect the majority by allowing it to compel minority owners to join a sale of the whole company. A buyer who wants one hundred percent will require this.
• Buyout, put, and call rights. The mandatory or optional purchases discussed throughout this guide.
• Joinder. Any new owner must sign on to the same terms, or the structure erodes with every transfer.

Minority owners should pay particular attention to how these interact, since a drag along right without a tag along right is a one sided arrangement. Our guide to protecting minority owners covers the terms worth negotiating before signing anything, and series LLC structures raise additional considerations where separate business lines are involved.

Common Mistakes

1. Not Having One

By far the most common. The owners intend to get to it, the business gets busy, and the document never gets signed. Then a trigger happens.

2. Never Updating the Valuation

The Connelly failure. A fixed price mechanism that nobody exercises is worse than no mechanism, because it looks like a procedure while providing none of the protection.

3. Underfunded Insurance

Coverage sized to a company worth two million, on a company now worth eight. The agreement promises a buyout the funding can’t deliver, and the shortfall becomes a note the company may not be able to service.

4. No Disability or Divorce Trigger

Disability is more likely than death during working years, divorce is common, and both are routinely omitted.

5. Copying a Template

Buyout provisions depend on entity type, owner count, tax posture, and whether ownership is family concentrated. A downloaded form doesn’t know any of that, and Section 2703’s comparability test isn’t satisfied by boilerplate.

6. Ignoring the Interaction With the Estate Plan

A buy and sell agreement that conflicts with an owner’s will or trust creates a conflict discovered at the worst possible time. The business documents and the estate documents need to be read together, which is why revocable trusts, irrevocable trusts, and grantor trust planning belong in the same conversation.

7. A Shotgun Clause Between Unequal Owners

Discussed above. It reads as symmetrical and functions as a one way option when the owners have very different access to capital.

8. Silence on Insurance Proceeds

After Connelly, an agreement that doesn’t say whether insurance proceeds are inside or outside the purchased value has left the central question open.

Getting Started

If you have no agreement, or one you haven’t read in years, the sequence is straightforward.

First, Get the Facts

1. Locate every governing document: operating agreement, any buy and sell or shareholders agreement, and every amendment
2. Pull the insurance policies and confirm owner, beneficiary, and face amount on each
3. Get a current, defensible sense of what the business is worth
4. Confirm the current ownership percentages actually match the documents

Second, Have the Conversations

1. What should happen if each owner dies, becomes disabled, divorces, or wants out
2. Whether the remaining owners want the obligation to buy, or the option
3. What each owner can realistically fund, and over what period
4. How the business should be valued, and by whom

These are the conversations many owners have never had, and they’re the substance of the engagement. The drafting is the easy part once the answers exist. Companies that use us as outside general counsel get their buyout terms reviewed as ownership and values change.

Third, Coordinate the Advisors

1. Counsel drafts the agreement and the accompanying transfer mechanics
2. Your CPA models the tax consequences of each structure
3. Your insurance advisor sizes and structures the funding
4. Your estate planning documents get reconciled with the result

Frequently Asked Questions

• Do I need a buy and sell agreement if I already have an operating agreement?

  Usually yes. Most operating agreements address voting, management, and distributions but say little about what happens when an owner dies, divorces, or becomes disabled. The buyout terms can live inside the operating agreement or in a separate document, but the substance has to exist somewhere and the two have to be consistent.

• What is the difference between a redemption and a cross purchase?

  In a redemption the company buys the departing owner’s interest. In a cross purchase the remaining owners buy it individually. Redemption is administratively simpler, especially with several owners. A cross purchase gives the buying owners a higher basis that can reduce their tax on a later sale of the company, and it keeps insurance proceeds off the company’s balance sheet.

• How did the Connelly decision change things?

  The Supreme Court held in 2024 that life insurance proceeds a corporation receives to fund a redemption are a corporate asset that increases the company’s value for estate tax purposes, and that the obligation to redeem does not offset them. Redemption structures funded by company owned insurance should be reviewed, though for most Oklahoma businesses the practical estate tax consequence is limited by the fifteen million dollar federal exemption for 2026.

• How often should we update the valuation?

  Annually if your agreement uses an agreed fixed price, and that is not optional. The Connelly agreement required annual valuation and the owners never did it, which weakened their position considerably. If annual discipline is unrealistic for your business, use a formula or an appraisal mechanism instead of a fixed price you won’t maintain.

• Will the IRS accept the price in our agreement?

  Only if the agreement satisfies Section 2703, which requires a bona fide business arrangement, terms that are not a device to transfer value to family below full consideration, and terms comparable to what unrelated parties would agree to. The comparability requirement is often the hardest to meet, and the agreement generally has to bind the owner during life as well as at death. Family controlled businesses face the most scrutiny.

• What happens if we have no agreement and an owner dies?

  The interest passes through the estate to whoever inherits it, which may be a spouse or adult children with no involvement in the business. Nothing requires the company to buy them out and nothing requires them to sell. In an LLC they generally get economic rights without a vote, but you still have owners you didn’t choose, and any resolution has to be negotiated from scratch.

• Is life insurance the only way to fund a buyout?

  No, but it’s the only mechanism that delivers cash exactly when a death trigger occurs. Other triggers are commonly funded with promissory notes paid over several years, company reserves, or bank financing. Disability buyout coverage is available and frequently overlooked, even though disability is more likely than death during working years.

• Does Oklahoma have an estate tax?

  No. Oklahoma’s estate tax ended for deaths on or after January 1, 2010, so Oklahoma owners generally deal only with the federal estate tax, with an exemption of fifteen million dollars per person for 2026. That’s a real advantage compared with states that impose their own estate or inheritance taxes at much lower thresholds, and it narrows the practical reach of Connelly for most Oklahoma businesses.

• Can we include a noncompete in our buy and sell agreement?

  Often, yes. Oklahoma law voids most employee noncompetes, but it allows someone who sells the goodwill of a business to agree not to compete within a specified county and the counties that border it, or a specified city or town, while the buyer carries on a like business there. Whether a particular buyout fits that rule depends on the facts and the drafting, so it should be reviewed against the current statutes rather than copied from a form.

• What is a shotgun clause and should we have one?

  One owner names a price and the other must either buy or sell at that price, which forces the offeror to name a fair number. It works well between owners with comparable financial capacity and works badly when one owner has substantially more liquidity, because the owner who can’t fund a purchase can only ever be the seller. Consider a valuation floor or funding requirements if you use one.

• Does company owned life insurance need the owner’s consent?

  For a company owned policy on an owner who works in the business, yes in practice. Federal tax law requires written notice and the insured’s written consent before the policy is issued. Without them, the company’s tax free amount can be limited to the premiums it paid.

Disclaimer: This article provides general information about buy and sell agreements, business valuation, and related tax considerations, and should not be considered specific legal, tax, or financial advice. Outcomes depend on entity type, ownership structure, valuation facts, and individual circumstances. Tax law and the amounts referenced here change over time. For guidance on your specific situation, consult with qualified Oklahoma business attorneys, tax advisors, and valuation professionals.

About Cantrell Law Firm: We are an Oklahoma City and Edmond business, estate, and oil and gas law firm. As former entrepreneurs, we help business owners structure ownership, plan buyouts and succession, and keep their agreements in step with the business as it grows. Learn more about our business succession planning practice. Contact us to discuss your ownership and succession planning needs.