The Importance of a Shareholder Agreement

Today I answered a question on Avvo (www.avvo.com) in which someone asked how they buy out one of their fellow shareholders (actually, they called the individual a partner, but since the structure is that of a corporation, the individual would legally be a shareholder).  The answer to that question is quite clear if there is an agreement in place among the owners (Shareholder Agreement for a corporation, Operating Agreement for a limited liability company or Partnership Agreement for a partnership).  The terms of buying out one owner of the business is exactly the type of concern that should be addressed by owners of a business when it is first starting.  This is the “honeymoon” stage of the business when everyone is presumable on excellent terms with each other and there are very few assets (if any) to fight over.  At this stage everyone should agree on the method in which the ownership interest of one owner should be valued on the contingency of a buy-out of that owner or the death or disability of that owner (these may be different methods depending on the reason for the valuation).

My recommendation, generally, is that the company’s accountant value the business and that such valuation be relied upon by the owners in these types of situations. All of the assets of the business, including, bank accounts, leases, hard assets (buildings, land, furniture, equipment, etc), websites, trademarks (whether registered or not) and goodwill, should be considered.  Goodwill can include the value of the brand (but not if the owners are franchisees of a franchise system since the franchisor typically keeps all goodwill associated with the brand and trademarks); customer lists and other intangible assets of the business.

The best way to eliminate an unwanted owner of a business is to find an independent third party, such as the company’s accountant, or an independent valuation company to determine the value of the business and then pay that owner his or her share of that value.  Typically it is best for the remaining owners and the company to have that payment staged over a period of years or at least months so that the company is not left without financial reserves.

This post is not intended to provide legal advice for your specific situation or to create an attorney-client relationship.  If you would like to speak with me about your specific information, please contact us at 215-525-1165.