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.