Business Succession Planning: The Shareholder, Operating or Partnership Agreement
by Robert A. Hull
For many of us, one of our most valued assets, is our business. What happens when you or one of your business partners becomes disabled, divorces, retires or passes away? Will your business continue to function smoothly? Will there be infighting between owners or spouses/estates/children of owners?
Hopefully, you established procedures for some of these scenarios when you started your company. If you didn’t, you need a business succession plan. Here’s a hypothetical to illustrate why:
You co-own a custom wing-nut company that manufactures state-of-the-art custom wing-nuts for almost any industry that uses this type of fastener, with a partner who is married with three children. You are also married, with three children.
However, you’ve never gotten along with your partner’s spouse, who you think is spoiled, grasping and just plain annoying. Worse, your partner’s three kids all embody many of the same negative traits.
To further complicate matters, your own spouse worked from home throughout your own marriage, raising three mostly good kids . . . a great parent, but not in the least bit business minded.
Your kids are a mixed bag. Two work for your company. One is creative – he came up with the brilliant idea of fluorescent wing-nuts which are selling like proverbial hotcakes. The other is financially-minded, the one who ensured you made the biggest profits possible on the project. The third kid just likes to head off to Las Vegas a lot. Frankly, you’re a little worried.
Some of the questions you should be asking at this point are:
- What happens to your company if your business partner passes away or becomes disabled, divorced or simply wishes to sell his or her share of the business? Will you suddenly be partners with his or her annoying spouse and three, bratty children or with a stranger?
- What happens to your own interest and your company if you should become disabled or pass away?
It is crucial that you put into place a plan to address the above scenarios before any of them manifest.
Business succession planning may sound complex, but it’s really a lot less difficult than leaving everything up to fate or “crossing those bridges when you come to them.” No good comes from kicking the can down the road.
The Shareholder/Operating/Partnership Agreement – Defining Intentions and Handling Disputes
A Shareholder Agreement (for a corporation), Operating Agreement (for an LLC), or Partnership Agreement can provide some answers to these questions.
It will clarify what you and your business partner intend for your company, and can provide guidelines for handling future disagreements. The agreement (sometimes referred to as a “buy-sell” agreement), or in some instances the governing documents of the business itself, should set forth:
- The respective ownership interests of the business partners.
- The next steps to take when an owner resigns or retires, becomes disabled or dies, or files for personal bankruptcy (e.g., buyout provisions, rights of first refusal, etc.;
- The valuation of the stock or interest;
- If your company will buy out the departing or deceased shareholder’s stock or interest.
All of these issues, and more, should be addressed in a good Shareholder/Operating/ Partnership Agreement to avoid the business pitfalls resulting from a change in personal circumstances. An ounce of prevention is worth a pound of cure.