A vast majority of businesses have possession groups of less than five people. While this provides for efficient and effective management, difficulties arise if something happens to one of the owners.
If your company has multiple owners, ask yourself what happens if:
· The owners can not get along?
· One of you is hospitalized for an extended period?
· An owner becomes divorced [and the partner is awarded half the stocks?]
· An owner stops coming to work?
· You wish to sell stock to a third party?
· An owner passes away?
· One of you wants to retire?
All of these events can seriously disrupt your business, especially ownership disputes. If the owners can not agree to a plan of action, they frequently wind up in court and a judge may become involved in the actual running of the organization. Many businesses which were otherwise successful have failed due to such disputes.
How do you avoid these issues?
The ideal solution would be to pursue an agreement between the parties until there are problems. This agreement, sometimes referred to as a buy-sell agreement, is a contract between the owners [and their spouses, if any]. The objective of the document is to address how disputes, ownership sales and other events will be addressed before they occur. These issues are much easier to deal when emotions aren’t involved.
The most frequent issues addressed in the possession arrangement are when and the equity interest will be bought back by the company or other owners.
Frequent topics include:
· First Right of Refusal if a shareholder attempts to sell their inventory.
· Right of owners to purchase the stock from the estate of a deceased owner to prevent ownership by the kids or spouse of the deceased owner. This can be combined with life insurance products to provide a way for making payment; · Right to buy back stock from an owner that documents personal bankruptcy.
· Right to buy back stock from an owner that is found to be mentally incompetent [drug dependence, etc.].
· Right to buy back stock from an owner that fails to execute their assigned responsibilities; and a buy-sell arrangement is a intelligent and effective way of short-circuiting ownership disputes before they happen. If your corporation is made up of at least two owners, then you should seriously think about placing an agreement in writing to prevent debilitating disputes.