If you have two or more owners who are unrelated (except husband & wife) that own approximately equal shares of a business (corporation, limited liability company or limited partnership) or have a family owned business where your kids may someday take over, or perhaps you are a silent investor, one of the biggest mistakes you can make is to ignore the fact that sooner or later the ownership of your business will change hands.
I have seen time and time again the results when business owners don’t’ take the necessary steps to eliminate the surprises, the hassles and the unexpected by preparing in advance the terms and conditions for any changes in ownership.
Sadly, and more often than not, the stories shared with me over the years of how this one issue turned into a major conflict that literally destroyed an existing company. The same is true for family owned businesses. To think that families are always harmonious and that severe discords never arise among parents, siblings and children is patently foolish. In truth they fight, in some cases, with a savagery that makes most business battles look like petty squabbles!
Here’s what can potentially happen without any advanced planning:
-You may be forced to work with and share control of the company with a total stranger who may be untrustworthy and inexperienced simply because they bought the interest of a departing co-owner.
-You may be forced to work with the spouse or other family member of a divorced or deceased owner.
–You may find yourself co-owning the company with a bankruptcy trustee or creditor, if a co-owner secured loans with his ownership interest and then defaults and files for personal bankruptcy.
-What if an owner has to be fired because of drug or alcohol abuse, steals from the company or harasses a coworker?
-What if a co-owner simply wants to retire, change vocations or has become dispassionate about the company and never shows up to work or meetings?
– You and the other co-owners may have total disagreement with a departing co-owner or her heirs on what price should be paid for her interest, which can result in angry deadlock forcing your attention away from the day to day operation of your business.
It is critical that you set some ground rules ahead of time so that there’s a specific plan in place to deal with ownership disruptions in a way that won’t wreak havoc on the business by providing pre-established rules for transferring interests. Plus, it’s best to agree—today—upon a method of valuing the business when no owner knows on which side of the transfer table he/she will be sitting. Not knowing whether one will be a buyer or a seller tends to ensure that all owners work to protect the interests of both buyer and seller.
Of course, planning in advance to contend with likely disputes is not the same thing as saying you can prevent change. You can’t. However, the point is that crafting a good buy-sell agreement can make this process as positive as possible, and will help you avoid change’s most unfavorable aspects. If you started your own business because you wanted to do your own thing, allowing you to work with people you enjoy and to control your own destiny, then a buy sell agreement will make sure it stays that way. Getting along with your co-owners and making these types of important decisions together right from the start can make a huge difference in the future of your company as well offering a certain level of protection for you and your co-owners for years to come.