Selling a business is one of the most significant decisions an entrepreneur or business owner can make. If your business has multiple partners or co-owners, the decision-making process becomes more complex. Who has the authority to make the final call on selling the company? Is it a unanimous decision, a majority vote, or can one partner decide alone? The answer often lies in the operating agreement, a critical document that outlines the rules for governance and decision-making in a partnership or LLC.
In this blog, we’ll explore the key factors that influence who can decide to sell your business and why it’s crucial to understand the operating agreement in advance.
Understanding The Operating Agreement
An operating agreement is a contract that outlines how a business will be managed, including how decisions will be made. For LLCs (Limited Liability Companies) or partnerships, the operating agreement specifies the rights and responsibilities of the partners and how disputes, ownership changes, and major business decisions—like selling the company—are handled.
While a sole proprietorship or a one-owner LLC doesn't involve other partners in decision-making, multi-owner businesses have more layers of complexity. The operating agreement is the document that dictates how ownership decisions are made, and it can vary depending on how it is written.
The Authority To Sell The Business
Whether one partner can sell the business or if every partner must agree depends largely on the specific terms laid out in the operating agreement. Below are common decision-making structures:
Unanimous Consent
In some businesses, particularly where each partner has an equal stake in the company, the operating agreement might require unanimous consent to approve the sale. This means that all partners must agree before any transaction takes place. This structure ensures that no single partner can unilaterally decide to sell the business, protecting the interests of everyone involved.
Majority Vote
Another common approach is requiring a majority vote for significant decisions, such as selling the business. If the operating agreement specifies that a simple majority (50%+1) of the ownership can approve the sale, then partners with the majority ownership have the power to decide. This structure works well in businesses where it’s more important to move forward with decisions quickly and where the partners trust each other to respect the majority opinion.
Supermajority Vote
Some agreements may call for a supermajority—typically defined as a vote of two-thirds or three-fourths of the partners—to approve a sale. This is often seen in businesses where a smaller group of partners holds a significant portion of the business but doesn’t have sole control. A supermajority requirement ensures that the decision to sell is not made lightly and requires a larger consensus among the partners.
Single Partner Authority
In rare cases, the operating agreement may grant a single partner the authority to sell the business, especially in cases where one partner holds a majority or controlling interest. If one person has a large enough share of the business, the operating agreement might allow them to decide on the sale without needing approval from other partners. This type of agreement would give that individual significant power over the future of the company, but it’s important to note that such clauses are often controversial, as they limit the influence of other stakeholders.
What Happens If There’s No Clear Agreement?
If the operating agreement is silent on the issue of selling the business, state law will typically govern how the decision is made. Most states will look to majority ownership to make key business decisions unless otherwise specified. However, if the situation becomes contentious and no clear guidelines exist, it could lead to costly and time-consuming legal battles.
This is why it’s essential to have a clear operating agreement from the start that outlines the decision-making process, including the sale of the business.
Key Factors That May Affect The Decision To Sell
Even if the operating agreement specifies how the sale decision should be made, there are other considerations to keep in mind:
Valuation Disagreements: Partners may disagree on the valuation of the business or the terms of the sale, which can complicate the process.
Market Conditions: A sale might be more appealing under certain market conditions, which could prompt partners to move forward with or delay a sale.
Personal Circumstances: Partners’ personal situations—such as health issues, retirement, or other business ventures—might influence the timing or willingness to sell.
How To Protect Yourself And Ensure Clear Guidelines
As a business owner or partner, ensuring that your operating agreement is clear and up-to-date is key to avoiding confusion, disputes, and unnecessary conflict down the road. Here are some steps to protect your interests:
Clearly Define Decision-Making Powers: Specify whether the decision to sell requires unanimous consent, a majority vote, or if one partner can make the decision. This eliminates ambiguity.
Consider Future Exit Strategies: Include provisions on how to handle a sale, such as buyout options, and under what circumstances a sale can occur.
Consult An Attorney: Have a legal professional help you draft or revise the operating agreement. They can provide valuable insight on the potential risks and ensure that all eventualities are covered.
Conclusion
The ability to sell your business is not solely up to one individual unless specifically outlined in your operating agreement. Whether the decision rests on unanimous consent, a majority vote, or the authority of one controlling partner, the rules are set by the terms laid out in the agreement. Before making any assumptions about who can sell the business, take the time to carefully review your operating agreement to ensure that it clearly defines decision-making processes. By doing so, you can avoid conflict and confusion and ensure that the sale—or any other significant decision—is made fairly and according to the rules everyone has agreed to.
If you are considering selling your business or entering into a partnership, it’s a good idea to speak with legal and financial professionals who can help ensure your operating agreement reflects your intentions and safeguards your interests in the future.
