Edition 333 – Shareholder’s Agreements
I’ve long been an advocate of shareholder’s agreements, particularly when:
- There are unrelated parties in business with each other.
- There are multiple family members in business with each other, who are not spouses.
It all stemmed from my first business relationship with Alan Redman in 1999. We agreed, before the start date, on a formal agreement between each other as to the obligations that we had to each other and to the business. In essence, it was like a pre-nuptial agreement between two parties that each brought something to the relationship.
As our business morphed into various incarnations, we updated that agreement, at least annually. By doing so, it meant:
- We reviewed it continuously to see whether all elements of it continued to apply.
- It enabled us to update, almost in real time, for anything that we felt had been overlooked.
- It clarified our business valuation model as we looked to bring additional owners into the business.
- We strengthened any dispute resolution issues that we saw had arisen amongst our clients, and which we wanted to be ahead of in our own business.
- We developed strategies around protecting the families of the business owners, with guarantees built in around financial security in the unexpected illness or death of a business owner, all whilst maintaining the integrity of the business itself.
In a recent presentation I was making for CPA Australia, I asked my former business partner, Peter Johnson, who was in the audience, how long it took us to agree to go our separate ways when we made the decision to do so in 2008. His instant and emphatic reply was 15 minutes! As I nodded, I took note of the other delegates in the room, almost all of whose eyes had popped out of their sockets at his bold, yet correct claim. 15 minute was all it took.
You see, when you:
- Document everything about your business relationship with someone else.
- Constantly review that document.
- Continue to look at it through the eyes of the business as well as your own position.
- Willingly commit to a full and frank discussion about the various elements of the agreement.
It shouldn’t take any longer than 15 minutes to agree to separate. There’s nothing to dispute as all parties know their position.
All of this is a nightmare for lawyers, of course! There’s no fighting or nitpicking over the minutiae of what is underway for, at the very least, you’ve agreed how you’ll be together in business AND how you’ll be apart in business, no longer than 12 months prior to actually deciding to part ways.
If you’re in business with someone else, related or not, and you don’t have a shareholder’s agreement in place, I can honestly say that you’re chancing your luck. At some stage, one or both of you will want to go your own way, retire or, even worse, be struck down by illness, accident or die. When that happens, that’s when the lawyers start to rub their hands.
This Week’s Tip
” A Buy-Sell Agreement is a second document, attached to the Shareholder’s Agreement,
which is triggered on the death or total and permanent incapacity of an owner of the business.
It’s critical in preparing for the unexpected.”