Secure Succession: Illinois Business Buy-Sell Agreements
TL;DR: A buy-sell agreement sets clear rules for ownership transitions in Illinois closely held businesses. Choose a structure (cross-purchase, redemption, or hybrid), define triggers, use a defensible valuation method, and line up funding. For corporations, transfer restrictions must be properly noted (including on uncertificated share information statements) to bind transferees. LLC operating agreements commonly restrict transfers and set buyouts, subject to the Illinois Limited Liability Company Act. Coordinate with tax, insurance, and governance documents—and review regularly.
Why a Buy-Sell Agreement Matters
A buy-sell agreement sets the rules for what happens to an ownership interest when an owner dies, becomes disabled, retires, is terminated, divorces, or wants to sell. For Illinois closely held corporations, LLCs, and partnerships, a well-drafted agreement can: (1) keep ownership within approved hands, (2) provide a clear valuation and purchase process to reduce disputes, (3) ensure liquidity for the departing owner or heirs, (4) protect licenses, permits, and banking relationships, and (5) coordinate with estate and tax planning.
Common Structures in Illinois
Illinois businesses typically use one or a combination of:
- Cross-purchase agreements: remaining owners buy the departing owner’s interest.
- Entity-purchase (redemption) agreements: the company redeems the interest.
- Hybrid agreements: purchase rights allocated between owners and the entity.
Choice depends on number of owners, desired control, tax posture, and funding strategy.
Triggering Events to Address
Your agreement should define when a buyout is required or permitted, such as death, disability, retirement, voluntary sale, involuntary transfers (e.g., bankruptcy), divorce or domestic relations orders, deadlock or termination for cause, and key license or certification loss. Clear triggers reduce ambiguity and litigation risk.
Valuation Methods
Illinois law allows owners to agree on valuation and transfer mechanics in their governing documents, subject to applicable statutes and fiduciary duties. Common approaches include:
- Fixed price with periodic updates.
- Formula-based pricing (e.g., multiple of earnings or adjusted book value).
- Independent appraisal processes, often with tie-breaker mechanisms.
The agreement should also address discounts or premiums, timing, and how disputes are resolved.
Funding the Buyout
Funding provisions make the agreement workable. Typical options include:
- Life insurance or disability buyout insurance.
- Installment notes with security interests or personal guarantees.
- Sinking funds or capital call mechanisms.
- Bank financing with covenants coordinated to the agreement.
Align coverage amounts, ownership/beneficiary designations, and premium responsibilities with the chosen structure.
Corporate, LLC, and Share Restriction Considerations
Corporations: The Illinois Business Corporation Act recognizes restrictions on transfer or registration of shares if they are not manifestly unreasonable and are noted conspicuously on the share certificate or, for uncertificated shares, in the information statement. Without such notice, a restriction generally is not enforceable against a person without knowledge of it (805 ILCS 5/6.55; see also 805 ILCS 5/6.27 regarding uncertificated shares and information statements).
LLCs: Illinois LLC operating agreements commonly restrict transfers and establish buyout terms, subject to the Illinois Limited Liability Company Act and any statutory limitations (805 ILCS 180/).
Ensure buy-sell language is consistent with articles, bylaws, or operating agreements, and that any share legends or notices are properly delivered to be enforceable against third parties.
Tax Coordination
Work with tax advisors to address: potential basis step-up opportunities in cross-purchase structures; tax characterization and earnings & profits effects in redemptions; valuation considerations under Section 2703 for estate and gift tax purposes; and insurance ownership/beneficiary choices and transfer-for-value rules. Ensure the valuation method is defensible for tax and financial reporting.
Key Terms to Draft Clearly
- Parties and covered interests.
- Triggers (mandatory vs. optional).
- Valuation process and tie-breakers.
- Funding and security.
- Payment terms, acceleration, and remedies.
- Non-compete and non-solicit covenants (as permitted by Illinois law).
- Notice requirements and timelines.
- Governing law, dispute resolution, and venue.
- Coordination with employment, equity incentive, and estate documents.
Process to Implement
- Review existing governance documents and any prior restrictions.
- Select structure (cross-purchase, redemption, or hybrid).
- Establish valuation approach and update schedule.
- Arrange funding (insurance, lending, or installment).
- Draft and approve the agreement at the entity and owner levels.
- Update share legends or LLC member notices.
- Align beneficiary designations and keep policies in force.
- Calendar regular reviews and life-event updates.
Special Notes for Illinois Businesses
- Illinois corporate law recognizes and enforces reasonable share transfer restrictions when properly noted on certificates or included in information statements for uncertificated shares (805 ILCS 5/6.55; 805 ILCS 5/6.27).
- LLC operating agreements govern transfer rights and buyout mechanics unless contrary to statute or the agreement (805 ILCS 180/).
- If using uncertificated shares, ensure information statements include any restrictions so they are effective against transferees without knowledge (805 ILCS 5/6.27; 805 ILCS 5/6.55).
- Coordinate with professional licensing or regulatory approvals that limit who may own an interest.
Practical Tips
- Put share transfer legends and uncertificated share information statements in place immediately after adoption.
- Calendar annual valuation check-ins and after major events.
- Cross-reference the buy-sell in employment, equity award, and loan agreements.
- Test liquidity: model buyout funding under worst-case timing.
Buy-Sell Implementation Checklist
- Confirm owners and cap table accuracy.
- Choose structure: cross-purchase, redemption, or hybrid.
- Select valuation method and tie-breaker process.
- Arrange insurance or financing and set beneficiaries.
- Draft agreement and obtain approvals.
- Update share legends or LLC notices; deliver information statements for uncertificated shares.
- Set payment terms, security, and remedies.
- Align tax and estate planning documents.
- Schedule periodic review.
FAQs
Do we need a separate buy-sell if our LLC has an operating agreement?
Often the buy-sell terms are built into the operating agreement. You can amend the operating agreement or adopt a standalone buy-sell that is incorporated by reference.
Are transfer restrictions enforceable against a buyer who did not know about them?
For corporate shares, restrictions are generally enforceable against a transferee without knowledge only if the restriction is noted on the certificate or, for uncertificated shares, included in the information statement under 805 ILCS 5/6.55 and 6.27.
How often should we update the valuation?
At least annually and after material events such as major financings, acquisitions, or significant revenue changes.
What if the company cannot afford the buyout at once?
Use installment notes with security, insurance proceeds, or bank financing, and include acceleration and default remedies in the agreement.
How We Can Help
We assist Illinois founders and closely held companies with designing, drafting, and funding buy-sell agreements that align with governance documents and tax strategy, and we coordinate with your insurance and tax advisors to implement a practical, enforceable plan. Contact us to get started.
Disclaimer (Illinois): This post provides general information as of the last reviewed date and is not legal or tax advice. Reading it does not create an attorney-client relationship. Consult qualified counsel about your specific facts and current Illinois law.