Right of First Refusal: Keeping LLC Ownership in the Right Hands

One of the biggest threats to the long-term stability of an LLC is when ownership changes hands unexpectedly or without member input. Whether it’s due to a sale, divorce, or death, a member’s share could wind up in the hands of someone who doesn’t align with the business’s values, goals, or day-to-day operations.

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That’s where a Right of First Refusal (ROFR) comes in. This simple yet powerful clause gives existing members the first chance to buy a departing member’s ownership interest before it’s sold to an outside party. It’s a crucial tool for maintaining control, cohesion, and continuity—and it’s often overlooked until it’s too late.

1. What Is a Right of First Refusal in an LLC?

A Right of First Refusal (ROFR) is a legal provision that gives existing members of an LLC the opportunity to purchase a member’s ownership interest before that interest can be sold or transferred to an outside party.

Here’s how it works in practice:

• A member receives an offer to sell their ownership interest to a third party.
• Before completing the sale, the selling member must present the offer to the LLC or other members.
• The remaining members then have the right to match the offer—same price, same terms—and keep the ownership internal.

This isn’t about restricting a member’s right to sell—it’s about making sure any transition in ownership happens with member awareness and approval.

It’s especially useful in closely held LLCs where the identity and involvement of the members directly impact trust, decision-making, and operations.

2. Why LLCs Use a Right of First Refusal Clause

In a business where trust, alignment, and shared goals matter, not just anyone should become an owner. A Right of First Refusal clause helps maintain that integrity by ensuring existing members have a say before outside ownership is introduced.

Here’s why it matters:

1. Maintains Control and Cohesion

ROFR helps preserve the tight-knit structure that many LLCs are built on. Members know each other’s working styles, share a long-term vision, and have established ways of making decisions. Introducing a new, external owner—especially one with no prior relationship—can disrupt that balance.

With a ROFR clause in place, members can prevent outside parties from entering the business unless everyone is aligned. This maintains the cohesion needed to operate smoothly.

2. Protects Against Unwanted Transfers

Life events like divorce, bankruptcy, or death can result in ownership unintentionally transferring to heirs or third parties. In these situations, you might suddenly find yourself sharing ownership with a relative of a former member—or even a creditor.

ROFR gives members the option to step in and buy that interest first, keeping the business ownership where it belongs: with people who understand and are invested in it.

3. Preserves Company Culture and Values

Whether it’s a family-run business, a professional services firm, or a long-standing partnership, culture is hard to build—and easy to lose. ROFR helps ensure that new owners share the values, goals, and work ethic of the group.

3. How a Right of First Refusal Clause Works

While a Right of First Refusal clause is simple in principle, its effectiveness lies in the details. To work smoothly and fairly, it should outline a clear, step-by-step process for how ownership can change hands.

Here’s how a typical ROFR clause functions in practice:

Step 1: A Member Intends to Sell Their Interest

When a member wants to sell part or all of their ownership in the LLC, they must notify the LLC or the other members of their intent. This includes disclosing whether they’ve already received an offer from a third party.

Step 2: Offer Is Presented to the LLC or Remaining Members

If a third-party offer has been made, the selling member is usually required to provide the full terms of that offer in writing. That means:

• Purchase price
• Payment terms
• Any contingencies
• Timeline for closing

This ensures that existing members have all the information needed to make an informed decision.

Step 3: Members Have a Set Window to Respond

The operating agreement should define a specific time period—commonly 30 to 60 days—during which the LLC or remaining members can choose to match the offer and purchase the interest. If they act within that window, the sale proceeds internally under the same terms.

Step 4: If Declined, Sale Proceeds to the Third Party

If the LLC or members choose not to buy, the selling member is generally free to sell the interest to the third party—but only under the same terms that were offered internally. If the terms change materially, the ROFR process often has to restart.

This process:

• Gives current owners transparency and control
• Discourages rushed or secretive deals
• Helps ensure ownership transitions happen in the LLC’s best interest

4. What to Include in a ROFR Clause

A strong Right of First Refusal clause isn’t just a statement of intent—it’s a practical set of instructions that ensures everyone knows what to do when an ownership transfer is on the table. Without clear language, even the best intentions can fall apart under pressure.

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Here’s what a comprehensive ROFR clause should cover:

1. Trigger Events

Define the events that activate the ROFR. Common triggers include:

• A member voluntarily selling their interest
• Death or incapacitation of a member
• Divorce or bankruptcy that affects ownership
• Transfers to trusts, spouses, or other related parties

You can tailor this list depending on how tightly you want to control ownership transitions.

2. Notice and Disclosure Requirements

Spell out how the seller must notify the LLC or other members, including:

• A written notice of intent to sell or transfer
• Full disclosure of the offer terms (price, buyer, payment terms)
• Any deadlines that apply

This ensures everyone is working from the same information.

3. Timeframe for Response

Give the LLC or members a clear and reasonable window to decide whether to exercise the ROFR—typically 30 to 60 days. Also include what happens if no response is given (e.g., automatic waiver of the right).

4. Valuation Method (If No Third-Party Offer Exists)

If there’s no outside offer—say, a member wants to exit but hasn’t found a buyer—then your clause should include a way to determine the value internally. Options include:

• Independent appraisal
• Pre-agreed formula (e.g., a multiple of earnings or book value)
• Annual valuation updates built into the operating agreement

5. Who Gets Priority

Specify whether the ROFR goes to:

• The LLC itself (the entity)
• The other members proportionally
• A designated class of members (e.g., managing members first)

This helps avoid confusion or competition between members who may all want to buy.

5. ROFR vs. Right of First Offer (ROFO)

While a Right of First Refusal (ROFR) is a popular tool in LLC operating agreements, it’s often confused with—or compared to—a Right of First Offer (ROFO). Understanding the difference is crucial when deciding how much control you want to give existing members over ownership changes.

Right of First Refusal (ROFR)

With a ROFR, the process begins after a third-party offer has already been made. The seller brings that offer to the LLC or members, who then have the option to match the same terms.

Key features:

• Members don’t have to negotiate upfront—they only act if a deal is imminent.
• Provides stronger protection by allowing members to block outside buyers.
• Can discourage external offers if potential buyers know their deal might get matched and fall through.

Right of First Offer (ROFO)

A ROFO works differently: before a member shops their interest to outsiders, they must first offer it to the LLC or other members—usually at a price they set themselves. If the members decline, the seller can then go to the open market.

Key features:

• Members get a chance to negotiate first, before third-party involvement.
• Offers more flexibility to the seller, since they aren’t locked into matching another offer.
• May result in quicker internal sales but doesn’t prevent an outside buyer from offering better terms afterward.

Which One Is Right for Your LLC?

• Choose ROFR if your priority is to block third-party involvement and maintain internal control.
• Choose ROFO if you want to give members a first opportunity, but are okay with selling externally if the internal deal doesn’t work out.

Conclusion

A Right of First Refusal clause is one of the most effective tools an LLC can use to control who gains ownership, especially in moments of change like retirement, divorce, or unexpected exits. It ensures that existing members have the opportunity to keep the business in trusted hands before outsiders are brought into the fold.

When structured clearly and thoughtfully, a ROFR clause can:

• Preserve company culture and decision-making stability
• Prevent unwanted or unqualified buyers from gaining a stake
• Reduce conflict and confusion during transitions
• Protect your LLC from being disrupted by life events like death, divorce, or bankruptcy

But a ROFR clause only works if it’s in writing, clearly defined, and understood by all members. Without one, your business could end up entangled in outside sales, legal disputes, or ownership misalignment.

If your LLC’s operating agreement doesn’t include a Right of First Refusal—or hasn’t been reviewed in years—it’s time to act. Talk to your attorney or business advisor about how to implement or update this clause, and ensure your ownership stays exactly where it belongs.

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