I want to sell part of my company to a new shareholder. What should I do?
Tell your advisors exactly what you want to achieve out of the deal.
If you want ensure that a shareholder-employee will stay, then make sure your advisors know this so they can be thinking about how to ensure that objective. If you are looking for a source of capital, your advisors need to be thinking about what strings will be attached. If you are looking to start a succession plan, your advisors need to be thinking about how this sale might fit into the broader picture. We spend time listening to what clients want, and then we so we are better able to offer insights from our experience about what can be done to get there.
Clarify precisely what you expected from the new shareholder. Misplaced expectations are a huge catalyst for disputes. It is a great idea to write all the important things down in your agreement. We like to record the parties’ background, how they got to this point, what they ‘expect’, and how they envisage the relationship will pan out in the future. That way, the agreement becomes a useful reference point for ‘what we did say at the start’.
There are three big issues that any Shareholder’s Agreement must cover: i) Who is going to be in charge? Who will the directors be? Who can vote in new directors? What is the formal chain of command? How much ‘say’ can the newcomer expect? ii) How will you cope with a dispute? Methods include court resolution, arbitration, and mediation. Mediation, arbitration and court resolution. See point 4 below for more on this. iii) How will (either of you) get your money out? In a practical sense, having ‘liquidity’, i.e. the ability to sell, adds real value.
When people go into business together, the mood is often euphoric. The parties just want to get on, and get the deal settled. They will say ‘Disputes? What disputes? We will get along fine.’ The trouble is that when a dispute arises, trust usually breaks down, and then one side will try to hold the other to ransom. Often it is just too expensive to go to Court, or to arbitrate, and the parties are left having to accept the status quo. One way to avoid this is to have a mechanism that allows a buy-out on an agreed formula. Having an ‘out’ if things don’t work out is the best insurance that you will actually get along fine.
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