When a small business has more than one owner, it is important for them to establish their relationship in writing.
Business partners have a special relationship. With multiple owner companies, each owner brings something of value, whether it be skills, capital, or relationships. The proper functioning of the business relies on each partner’s service with the company.
If a co-owner retires, becomes disabled, or dies, it typically makes sense for them to divest from the company. But their years of dedication building the company should not go unrewarded. A Shareholder Agreement dictates the terms of such an arrangement.
Shareholder Agreements are sometimes called Buy-Sell Agreements, and they take many different forms, such as Cross Purchase Agreements and Redemption Agreements. Essentially, they provide that upon one owner leaving the company, the other owners, or the company itself, will purchase the ownership of the departing person for a certain price. This ensures that the departing member, or his or her family, are compensated for the value of their interest, while their responsibilities to the business are extinguished.
Specific provisions can set the treatment for both voluntary and involuntary departures from the business, and can determine the method of funding the buyout. Because purchasing a departing owner’s shares can create a liquidity problem, Shareholder Agreements are often funded with life insurance and installment notes.
A Shareholder Agreement can be an important part of a business succession plan.