Businesses with more than one owner need strong Ownership Agreements. Simple as that. It’s rare that we meet a company with multiple owners, and find that important document is in order. Some companies rely on handshakes that took place decades ago. Others may have outdated contracts that don’t fit the company’s current size or ownership structure, while others don’t contemplate how to handle relatively common disagreement scenarios.
I could fill the rest of this blog piece on things that could go wrong when there isn’t a robust, up-to-date Ownership Agreement. The unexpected death of an owner can leave the surviving partners in business with a spouse or heirs. Divorces and new disabilities present uncharted territory that owners must navigate after the fact. Who decides how and when company stock can be sold? Or how to deal with unsolicited offers? Or what happens when a shareholder departs the company, voluntary or otherwise, and goes to work for a competitor?
Once one of these scenarios is already in play, it’s challenging to establish the rules. It’s far better to put together a solid Ownership Agreement that contemplates courses of action to take when there is owner disagreement. In partnership with NAVIX (www.navixconsultants.com), we analyze existing Ownership Agreements (and Buy-Sell contracts) to make sure the documents are sufficiently comprehensive to address the unexpected events that derail partnerships. (And, once we reach an agreement with the owners, we hand the blueprint to their attorneys to draft.).
The particulars of a comprehensive Ownership Agreement are beyond this blog’s scope, but I will touch on some key areas.
How to handle outside offers? Do the owners want a unanimous decision, or will a majority (or super-majority) suffice? The document should be crafted so minority owners can’t hold up the process or, conversely, be left behind.
How should stock be transferred? When a shareholder decides, for whatever reason, to sell or transfer stock, the partners need to have a process by which to approve (or not). Otherwise, they may get stuck with a new undesirable partner.
There are numerous ways that a transfer is necessarily warranted (death, termination, etc.), and the obligations of the departing shareholder (and the company) can differ depending on the circumstances. If the company is obligated to buy back the shares of a departing owner, is the “funding” (e.g., insurance) in place to accomplish the transfer? Otherwise, the company’s cash flow might be unduly burdened. Different scenarios may require different payout levels. Which leads to:
Do the owners have an agreed method with which to value the company? Some owners can agree on their firm’s approximate value. Sometimes this is done with the assistance of an agreed-upon formula, or with an outside valuation expert.
Breaking ties. When it is mathematically possible for disputing owners not to reach a vote resolution, the document should contain methods and approaches to break deadlocks. Different ways to resolve ties could apply to the above issues and other areas such as how to issue new stock, conduct capital calls, and determine distributions.
Questions? Please contact us at DM Buck Advisory, LLC (david@dmbuck.com).
Based in Atlanta, Georgia, DM Buck Advisory, LLC provides business owners valuation/appraisals, stronger messaging with investors, or, through our partnership with NAVIX Consultants, a practical roadmap towards a more efficient and successful ownership exit.
