Key Insight
The operating agreement is the first document to request in any LLC acquisition. Transfer restrictions or consent requirements buried in a 5-year-old operating agreement can block or delay a deal that looks otherwise simple.
Key Provisions for Acquisitions
Transfer restrictions: Many operating agreements require the consent of all or a majority of members before membership interests can be transferred. If there are multiple members (partners), each must agree to the sale.
Right of first refusal (ROFR): Some operating agreements give existing members the right to purchase the selling member's interest at the same price being offered by a third-party buyer. If a member exercises the ROFR, the deal with the outside buyer is blocked.
Tag-along/drag-along rights: Drag-along rights allow a majority member to compel minority members to sell alongside them. Tag-along rights allow minority members to participate in a sale being made by the majority. Relevant when the business has multiple members.
Management structure: Member-managed vs. manager-managed determines who has authority to sign contracts, make decisions, and execute the sale. The operating agreement may require majority or supermajority approval for a sale.
Post-Acquisition Amendment
After closing, the operating agreement is typically amended or replaced to:
- Reflect the new sole member (or new ownership structure)
- Remove provisions designed for multi-member operation
- Update management authority
- Reflect new company purpose or DBA if applicable
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