Right of First Refusal

There might come a day when an owner wants out of the busi­ness. There are a few ways to han­dle this.

The first way is an out­right pro­hi­bi­tion of a trans­fer. This is harsh and hardly ever used. Another way is to require the con­sent of the other own­ers before an owner sells his inter­est. But this gives a lot of power to the con­sent­ing own­ers who can force down the price. Another way to han­dle this is to pro­hibit a sale except to qual­i­fied buy­ers or cer­tain indi­vid­u­als. None of these options work every well. The bet­ter way is for own­ers to agree that the com­pany and all of the own­ers have a right of first refusal on any offer from an out­sider to pur­chase an owner’s inter­est in the com­pany. Here’s how it works.

An owner places his or her own inter­est up for sale and gets a bona fide offer. The sell­ing owner must give the other own­ers a detailed notice of the offer (this might include a copy of the offer itself). The com­pany or other own­ers then have so many days to exer­cise their option to buy the inter­est under the terms in the offer. If the com­pany and other own­ers don’t exer­cise their option, then the sell­ing owner is free to sell the owner’s inter­est to the orig­i­nal out­side buyer. This is a bal­anced approach that allows own­ers to sell their inter­est for a good price while allow­ing the remain­ing own­ers to retain some con­trol over new members.