A majority of businesses have ownership groups of less than five individuals. While this provides for efficient and effective management, difficulties arise when something happens to one of the owners.
If your business has multiple owners, ask yourself what happens if:
· The owners can’t get along?
· One of you is hospitalized for an extended period?
· An owner gets divorced [and the spouse is awarded half the shares?]
· An owner stops coming to work?
· You want to sell stock to a third party?
· An owner passes away?
· One of you wants to retire?
Each of these events can severely disrupt your business, particularly ownership disputes. If the owners can’t agree to a course of action, they often end up in court and a judge may get involved in the actual running of the business. Many businesses that were otherwise successful have failed because of such disputes.
How can you avoid these problems?
The best solution is to pursue an agreement between the parties before there are problems. This agreement, sometimes called a buy-sell agreement, is a contract between the owners [and their spouses, if any]. The purpose of the document is to address how disputes, ownership sales and other events will be addressed before they happen. These issues are much easier to deal when emotions are not involved.
The most common issues addressed in the ownership agreement are when and how equity interest will be bought back by the business or other owners. Common topics include: · First Right of Refusal if a shareholder tries to sell their stock;
· Right of owners to buy the stock from the estate of a deceased owner to avoid ownership by the children or spouse of the deceased owner. This is often combined with life insurance products to supply a means for making payment; · Right to buy back stock from an owner that files personal bankruptcy;
· Right to buy back stock from an owner that is found to be mentally incompetent [drug addictions, etc.]; · Right to buy back stock from an owner that fails to perform their assigned duties; and
A buy-sell agreement is a smart and effective means of short-circuiting ownership disputes before they occur. If your corporation consists of two or more owners, you should seriously consider putting an agreement in writing to avoid debilitating disputes.