Do you have a shareholder buyout agreement for your business?
Consider this scenario: You start a corporation with 4 partners, and each person has an equal share. One partner is pushing to be bought a year later; only there is nothing set in stone about how much to pay them.
Without legal documents developed in the initial formation phase, you are going to have to come up with a valuation of that 25% stock.
How do you determine a fair buyout amount when there are so many factors at play?
Here are a few aspects which will come into play in a shareholder buyout.
How do you determine value on a future shareholder buyout?
It’s not impossible to use various valuation methods to determine how much you should pay a shareholder should they choose to opt-out and you don’t have an agreement.
But there’s also plenty of room for uncertainty and conflict, which could have easily been avoided if agreements were established early on.
When it comes to buyouts, anyone can throw out a number that “seems” fair, but it’s complicated once you consider factors like:
- Initial financing debt
- Tax outcomes
Having a shareholder buyout agreement at the outset will help to minimize and prevent conflict down the line. Here are some points that you’ll cover with a business lawyer when developing a shareholder buyout agreement.
If you are just starting a new business with multiple partners, take extra steps to practice due diligence at the outset. This will save you stress and conflict in the future.
Return on Investment
What is the ROI that you can expect by buying out the business partner?
When you buy out your business partner, you are reinvesting into the business, either through another shareholder or as a corporation. Factors that affect this will include:
- Multipliers (in your industry)
- Business scope
- Economic factors that affect valuation,
- Seller motivation
- Depreciation of certain assets,
- Capitalized earnings in the business
Others may try to offer you ROI numbers based on specific industry standards. But getting clear on these numbers in the context of the actual business is a crucial part of understanding how to buy this shareholder’s interest.
All of this can be established in the shareholder buyout agreement.
Financing and Accounting
What is going on with your accounting? It can be complex and varies from state to state. A professional accountant can help you determine a value depending on:
- Tax and structuring
As far as financing and payment structure goes, there might be some unique financing opportunities related to your industry or region.
Ensure you’re clear about your financing options as early as possible and consult with your business partners and attorney for new ideas.
Capital and Contributions
What did each person contribute? Here you’ll want to cover not just cash but property, services, knowledge, professional networks, and other types of assets.
Figure out ahead of time how both monetary and non-monetary contributions will be valued currently and into the future.
Founders Management and Responsibilities
Once the shareholder buyout agreement is complete, the next step will be drafting your founders’ agreements.
Your founders’ agreement should outline your roles regarding how you will act as management for day-to-day operations.
Everyone should know this right off the bat, and it needs to be in writing. Start early discussing topics with co-owners.
- Current roles of owners/shareholders
- Future roles of owners/shareholders
- Compensation for each
- Conflict resolution process
- Who will oversee approvals
- Voting rules and thresholds for significant decisions
Intellectual Property & Non-Compete
Your founder’s agreement should outline what is considered intellectual property (IP), how it is valued, and how that will be incorporated into the business in the case of a sale.
A lawyer can help you draw up important documents to ensure that the information your employees and shareholders have stays with you. Prevent shareholders from breaking off and becoming your competition by having them sign a non-compete.
When it Comes to Legal, Don’t Cut Corners
Whether you’re firing a business, selling, or closing, you need to know how you will handle this to minimize loss, stress, and conflict.
A shareholder buyout agreement is just one of many important legal documents that will benefit everyone once it’s nailed down — and the sooner you do it, the better.
Get a qualified business lawyer to help you build your business from the ground up or solidify your foundation if your business is newly acquired.
They will help you navigate these waters and ensure that your business foundations are protected.
Click here to schedule a 30-minute consultation or call 1-855-976-3783 for more information.
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