Shareholders' agreements start with the idea of protecting the golden goose. As businesses grow to a certain size and stature, founders hope future generations of their families will benefit from the success they have achieved. To extend the privilege of ownership to their descendants, and to prevent shares from getting into the “wrong” hands, founders draw up shareholders' agreements.
We advise family business owners to proactively minimize conflict by creating flexible, rather than rigid, shareholders' agreements.
1. Plan an orderly exit process.
Create a provision in your shareholders' agreement to allow the company to redeem shares if and when some shareholders want out. Laying out an orderly exit process sets shareholders' expectations early on and avoids the chaos of negotiating a process and terms mid-transaction.
2. Offer periodic redemptions.
Ask the board to set aside a modest pool of funds to redeem shares on a periodic basis. This kind of planning helps boards and management avoid unpleasant surprises if any owners urgently need to dilute their shareholdings.
3. Establish a secondary market.
Consider organizing a group of shareholders who are interested in using their personal wealth, instead of the company's funds, to buy out other shareholders who are ready to move on. In doing so, they can simultaneously take pressure off the company and increase their own shareholdings.
4. Convert between classes of shares.
Offer to convert a disengaged shareholder's voting shares to some form of preferred shares, instead of redeeming those shares outright. Preferred shares lack voting rights but still provide cash flow and a connection to the family business.
Steve Salley is a partner and July Lin Walsh is a senior advisor at BanyanGlobal Family Business Advisors.
This is an excerpt from a longer article in
The Family Business Legacy Handbook.
Information about the book is available
here.
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