LLC member wants out but our operating agreement doesn't specify buyout terms — what happens now?

We have a 3-member LLC (Texas) formed in 2022. One member (33.33% ownership) now wants to leave the company. Our operating agreement is pretty basic - just says members can't transfer their interest without consent of other members, but doesn't say anything about buyout price, valuation method, or payment terms.

The departing member is demanding we buy him out at "fair market value" immediately. The other two of us think fair market value is way less than what he's claiming, and we don't have the cash to pay him out all at once anyway.

What happens when the operating agreement is silent on this? Who decides the price? Can we force installment payments?

This is a very common issue. When the operating agreement is silent, you fall back on the Texas Business Organizations Code (TBOC).

Under Texas law, a member can dissociate from an LLC, but that doesn't automatically entitle them to a buyout. The key question is whether your LLC is at-will or for a definite term.

If it's at-will (no specified duration), the dissociating member is generally entitled to receive the fair value of their membership interest within 120 days. If you can't agree on fair value, it typically requires court intervention or appraisal.

But first question: Does your operating agreement or certificate of formation specify a term/duration for the LLC?

No term specified anywhere. It's at-will. So he can force us to buy him out even if we don't want to?

And what's "fair value"? The company is cash flow positive but not profitable yet. We have $200K in revenue, about $50K in the bank, and burn $15K/month. He's claiming his third is worth $150K. We think that's insane.

Went through this exact situation in Delaware. Fair value typically means what a willing buyer would pay a willing seller. For an early-stage, not-yet-profitable company, that's often close to book value (assets minus liabilities).

Your $50K in the bank minus any debts is probably the starting point. So his third might only be worth $15-20K, not $150K.

We ended up hiring a business appraiser. Cost us $3K but settled the dispute because it gave us an objective number.

Under TBOC Section 101.205, yes, in an at-will LLC, a dissociating member is entitled to receive fair value within 120 days of dissociation.

Fair value can be determined by:

• Agreement: You negotiate a number
• Appraisal: Hire a neutral business appraiser (usually costs $2-5K)
• Court: If you can't agree, either party can petition the court to determine fair value

For early-stage companies, appraisers typically use asset-based valuation (book value) rather than income or market approaches. His $150K claim seems very high for a company with $50K in assets and no profits.

As for payment terms: Texas law says fair value must be paid within 120 days, but courts have allowed installment payments when immediate payment would cause financial hardship to the LLC. You'd need to demonstrate that.

From an accounting perspective, you need to be really careful about how you value this. A few things that might reduce the fair value:

• Lack of control: A 33.33% minority interest is worth less than 33.33% of total company value (typically 20-30% discount)
• Lack of marketability: LLC interests are illiquid - can't just sell them on the open market (another 20-30% discount)
• Book value vs. market value: For unprofitable startups, book value is often the floor

If your book value is $50K, his third is $16,667. Apply minority and marketability discounts and you're looking at maybe $10-12K.

This is super helpful. So our strategy should be:

1. Offer to hire a neutral appraiser (split the cost 3 ways)
2. If he refuses, we hire one anyway to have a defensible valuation
3. Propose installment payments over 12-24 months
4. If he still demands immediate full payment, let him take us to court where we show we can't afford immediate payment

Does that sound right?

That's a reasonable approach. I'd add a few things:

• Put your offer in writing via email - creates a record that you're acting in good faith
• In the offer, specify that he'll sign a full release and non-compete/non-solicit agreement as part of the buyout
• Consider whether you want to restrict his ability to compete during the payment period (if you do installments)
• Make sure the appraiser is certified (ASA, ABV, or CBA designation) so their report holds up in court if needed

Also, does he have any company property, passwords, or customer relationships you need to secure before he leaves?

Be very careful about the non-compete. In Texas, non-competes need to be ancillary to an otherwise enforceable agreement. You can't just add one to a buyout.

You CAN include it if it's part of the consideration (e.g., "We'll pay you $X, and in exchange you agree not to compete for 2 years"). But make sure it's reasonable in scope and duration or Texas courts will toss it.

Good point on the non-compete. He does have access to customer lists and pricing info, so we definitely want some protection there.

We sent him a formal offer yesterday - neutral appraisal, payment over 18 months, release of all claims, and non-solicit of customers for 12 months. Waiting to hear back.

Already got his admin access revoked and changed key passwords. Learned that lesson from another thread here.

Smart move on the access. One more thing - make sure you have a mediation clause in your buyout agreement. If he accepts your offer but disputes arise during the 18-month payment period, mediation is way cheaper than litigation.

And for anyone reading this thread: THIS is why you need a comprehensive operating agreement from day one. A good operating agreement would have:

• Defined valuation method (formula or appraisal process)
• Payment terms (lump sum vs. installments)
• Right of first refusal for remaining members
• Drag-along and tag-along rights
• Dispute resolution procedures

Costs $1-2K upfront to have an attorney draft it properly. Could save you $20-50K in disputes later.