A saw is like a shareholders’ agreement. Its value is when the business relationship changes and has to be severed. You want a clean cut, all the way through, not a partial cut which splinters the remaining wood.
There are two questions I like to ask business owners:
- What would happen if your business partner died tomorrow?
- What would happen if your business partner became disabled tomorrow?
If you are like many people I speak to, you may not have an answer or not a complete one. Read on. We have lots to explore.
What Is A Shareholders’ Agreement? Don’t Open The Doors Of Your Business Without One
If you are the sole owner of your business with no partners or other shareholders, then you do not need a shareholders’ agreement. If you are considering another partner or angel investor, then this agreement is essential to have. Many owners have well-written plans or directions for their businesses, but from my experience very few business owners and entrepreneurs have a proper plan to deal with issues that come up between shareholders.
Definition: A shareholders’ agreement is a business contract that governs the relationship of the shareholders to each other. It is an internal, confidential document that involves each of the shareholders and outlines how a company will be owned and managed with attention to the rights and obligations of the shareholders. It is a valuable document to have if the relationship breaks down or someone wants to leave the company.
A number of business owners I interviewed advise that if you start on your own, you should strive to be in a position where you don’t need a partnership. Should you go in jointly, their advice has been to have a secure shotgun clause to be able to get out of the relationship as best you can with a minimum amount of financial loss.
Failure to get professional legal advice will likely cost the business more, later on, than the agreement would have cost in the first place. Unfortunately, people tend to avoid any extra cost at the start-up stage and instead tend to rely on the handshake and ‘word is my bond’ security. A number of business owners I interviewed suggested that a way to save money was to reduce the amount of time spent in front of lawyers, but to not eliminate it. While you may find examples of shareholders’ agreements on the Internet, they can be complex and overwhelming. Go to your lawyer or accountant to get a basic summary of the issues you need to address.
A few of the people I interviewed feel that an accountant and a lawyer approach planning from opposite ends of the spectrum. A lawyer will focus on the negative of what can happen when things go wrong. An accountant will focus on the positives, such as how the business will make money, how it will be divided, and how to save taxes in the process.
From my experience 90 percent of shareholders’ agreements do not have buy/sell agreements and most of the 10 percent that do, do not have proper funding on the buy/sell. This represents a huge risk exposure for the owners.
But don’t worry; it is nothing we cannot fix. Keep reading to see if there are other things you need to consider.
Twelve things you should know before writing the agreement:
- Who owns how many shares, and for what reason? (What money was invested? What time was invested? Who came up with the idea or plan?)
- How is compensation determined?
- How are the shares held? Personally or in a family trust?
- If someone leaves will there be a non-compete clause?
- What happens if a shareholder becomes incapacitated or dies?
- Can the spouse or family member of a deceased shareholder become a shareholder?
- Who can buy the shares and how are buyouts to be handled?
- What should the valuation or valuation formula be for the shares?
- How should the buyout of shares be structured and what can trigger a buyout?
- How will the buyout be funded in each scenario? Where will the money come from?
- What is the method for dispute resolution?
- What could trigger the windup of the business?
To operate a business without a shareholders’ agreement, you are exposing yourself and your other shareholders to unnecessary risk.
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