A Maryland family business that has operated for two decades on a handshake among siblings eventually faces a moment when the handshake is no longer enough. One owner gets divorced. Another wants to retire. A third dies unexpectedly and her spouse inherits the membership interest. Without a buy-sell agreement, each of these events forces the remaining owners into negotiations with someone who has no operational role in the company, often through litigation. A Maryland business law attorney drafting a buy-sell agreement for a closely-held business in 2026 is solving for the moments the founders cannot predict, with the protections that allow the business to continue and the existing owner (or her estate) to receive fair value without destroying the company. This post walks through the structural decisions that make a buy-sell agreement work.
What a buy-sell agreement actually does
A buy-sell agreement is a contract among the owners of a closely-held business that governs what happens to an ownership interest on the occurrence of specified events. It establishes:
- Which events trigger a mandatory or optional purchase
- Who has the right or obligation to buy the interest
- How the price is determined
- How the purchase is funded
- What happens if the obligated parties cannot perform
A well-drafted buy-sell agreement keeps ownership of the business in the hands of people who actually run it, provides liquidity for the departing owner’s estate, and prevents the surviving owners from being forced to operate the business alongside an unwanted partner.
Cross-purchase vs. entity-purchase structures
The threshold structural choice is whether the remaining individual owners buy the departing owner’s interest (cross-purchase) or the entity itself buys it back (entity purchase, also called redemption). The choice affects everything that follows.
Cross-purchase structure:
- Each remaining owner buys a pro-rata share of the departing interest
- The remaining owners get a stepped-up basis in the purchased interest
- For two- or three-owner companies, the mechanics stay manageable
- Life insurance funding requires each owner to hold policies on each other owner, which can become complex with more than three owners
- Works well for S corporations where preserving basis and avoiding accumulated earnings issues matter
Entity-purchase structure:
- The company purchases the departing owner’s interest and retires it
- The remaining owners’ percentage ownership increases without a basis step-up
- Simpler insurance funding (one policy per owner, owned by the entity)
- Scales better to four or more owners
- Subject to accumulated earnings tax considerations and (for C corporations) potential constructive dividend treatment
Hybrid structures are common in Maryland practice. The agreement might give the entity a first-option right to purchase, with the remaining owners stepping in pro-rata if the entity declines. This flexibility is especially useful for businesses whose cash flow varies year to year.
Triggering events
A complete Maryland buy-sell agreement addresses each event that should produce a purchase. The standard list:
- Death: typically mandatory purchase, funded through life insurance
- Disability: typically mandatory after a defined period (commonly 6 to 12 months of total disability), funded through disability buy-out insurance or installment payments
- Retirement: often optional, with a defined notice period and installment-based payment terms
- Voluntary withdrawal: typically optional purchase at a discount to fair value, or with extended payment terms to discourage casual exits
- Termination of employment: for owners who are also employees, often a mandatory or optional purchase trigger
- Divorce: mandatory purchase if a spousal claim on the interest would arise, structured to prevent the interest from going to the ex-spouse
- Bankruptcy or insolvency: mandatory purchase to prevent a creditor from acquiring the interest
- Material breach of the operating agreement or shareholders’ agreement: mandatory purchase at a discount as a remedy
- Loss of professional license: mandatory purchase for businesses where licensure is essential (medical practices, law firms, accounting firms)
The agreement should define each event with enough specificity that the trigger is not itself a source of dispute. “Permanent disability” is not specific enough; “the owner’s inability, due to physical or mental incapacity, to perform her customary duties for a continuous period of 180 days, as determined by a licensed physician selected by mutual agreement” is.
Valuation methodology: how a Maryland Business Law Attorney structures the price
The single most contested issue in any buy-sell dispute is the price. Maryland buy-sell agreements typically use one of four valuation approaches:
- Fixed price: the owners set a value, updated annually or biennially through a written certificate signed by all owners. Simple to administer but easy to neglect, and a stale price disadvantages whichever side has the worse outcome under it.
- Formula: a defined calculation based on book value, multiple of EBITDA, multiple of trailing revenue, or capitalization of earnings. Workable for businesses with stable financials, problematic for businesses with cyclical or growing earnings.
- Appraisal: an independent business appraiser determines fair value at the time of the triggering event. Most defensible, but expensive and time-consuming (typically $15,000 to $50,000 for a small business).
- Hybrid: a fixed price applies if updated within a specified period (commonly 18-24 months), with appraisal as the fallback if the price is stale.
Each approach has tradeoffs. The hybrid structure is increasingly common in Maryland practice because it gives the owners incentive to update the price regularly while providing a defensible fallback.
The valuation provisions should specify whether the price reflects fair value (without minority or marketability discounts) or fair-market value (with those discounts applied). The difference can be 25-40 percent of the price on a $5M company.
Funding mechanics
A buy-sell agreement without funding is a promise without performance. The standard funding tools:
- Life insurance: the most common funding source for death triggers. Cross-purchase agreements use individual policies; entity-purchase agreements use company-owned policies. Premium allocation across multiple owners requires careful structuring.
- Disability buy-out insurance: funds disability triggers, with a defined elimination period matching the agreement’s trigger threshold
- Installment payments: typical for retirement, voluntary withdrawal, and termination triggers. Common structures run 5 to 7 years with interest at the applicable federal rate (AFR) plus a market spread
- Sinking funds: the company sets aside reserves over time, useful for predictable retirements
- Combinations: life insurance for death, installment payments for retirement, and a sinking fund for predictable transitions
The agreement should specify what happens if the funding fails. A life insurance policy that lapses, an insurance carrier that disputes coverage, or a company that cannot meet installment obligations during a downturn each need defined consequences and remedies.
Tax considerations for Maryland S corporations and LLCs
Maryland S corporations and LLCs face several tax issues specific to buy-sell structures:
- S corporation eligibility requires that all shareholders be eligible (no corporations, non-resident aliens, or most trusts). A buy-sell that allows transfer to an ineligible shareholder can terminate the S election. The agreement should expressly prohibit transfers that would jeopardize the S election.
- For LLCs taxed as partnerships, a redemption may trigger different basis adjustments than a cross-purchase, affecting the remaining members’ depreciation and amortization
- The §754 election (for partnership-taxed LLCs) allows inside basis adjustment matching outside basis on a purchase, which can produce significant tax savings for the remaining members
- Maryland personal income tax on the gain (2 to 5.75 percent state plus 2.25 to 3.20 percent county) applies to the seller’s net proceeds
- Estate and inheritance tax planning, including federal §6166 installment payment of estate tax on closely-held business interests, can interact with buy-sell payment timing
Bottom line
A buy-sell agreement is the difference between a business that survives a founder’s death, divorce, or retirement and one that gets unwound through litigation or forced sale. A consultation with a Maryland business law attorney can structure the buy-sell agreement to fit the actual ownership group, the realistic triggering events, the appropriate valuation methodology, and the funding capacity, and can keep the document updated as the business evolves. Useful background reading: the Maryland State Bar Association’s business law resources at msba.org and the IRS guidance on §754 elections and §6166 installment payments at irs.gov. Internal pages worth pairing with this post include a Maryland LLC formation guide, a member dispute resolution overview, and a fractional general counsel overview.











