Jun 2

Breaking Up Is Hard to Do—Unless It’s in Your LLC Agreement

Monday, June 2, 2025

Written by: Callie Kyhl

Building an exit strategy into a LLC operating agreement is a smart move to prevent conflict, clarify expectations, and ensure smooth transitions when a member leaves the business. Here’s how you can structure it:

1. Buy-Sell Agreement Clause

This is the core of any exit strategy.

  • Triggering Events: Define what events allow or require a member to exit, such as:
    • Voluntary withdrawal
    • Death or incapacity
    • Divorce (to avoid an ex-spouse becoming a member)
    • Bankruptcy
    • Dispute or deadlock
    • Retirement
  • Valuation Method:
    • Set a method for valuing the exiting member’s interest (e.g., fixed formula, third-party appraisal, EBITDA multiple).
    • Decide if value is fair market value, book value, or another defined term.
  • Funding Mechanism:
    • How will the LLC or members fund the buyout?
      • Lump sum
      • Installments
      • Life insurance proceeds (in the case of death)

2. Right of First Refusal (ROFR)

Prevent outside parties from entering the business unless the existing members decline to purchase the exiting member’s interest.

3. Drag-Along and Tag-Along Rights (Optional)

If the business is being sold:

  • Drag-Along: Majority owners can force minority owners to sell.
  • Tag-Along: Minority owners can join in the sale under the same terms.

4. Notice Requirements

Specify:

  • How and when notice of withdrawal or intent to sell must be given.
  • Any minimum notice periods (e.g., 90 days before exit).

5. Non-Compete & Confidentiality Provisions

Protect the business from a departing member competing or disclosing sensitive information.

6. Dissolution Option

If the LLC is very small or heavily dependent on a single member, consider:

  • Allowing dissolution upon certain exits.
  • Requiring a vote to continue the business.

Need Legal Advice?
If you have questions about how these laws affect you or your business, consulting a licensed attorney is the best next step. Legal interpretations and enforcement can vary by locality, and staying proactive can help you avoid costly legal trouble.

If you have any questions, please contact us at 703-369-4738 or info@vfnlaw.com.

This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer

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