A Shareholder Agreement protects a family business
A family business is unlike any other business as it has its own unique characteristics. Those unique characteristics are obviously the family dynamics and while it generally binds a family together when there is adversity, it can divide and create divisions and antagonisms that run deep.
However, just like any business, a family business has to grow, take on and manage risk or it will contract and die. Often that growth can best be made by bringing on non-family members such as employees or investors and sometimes it includes specialized skills including new management skills or philosophies. As a result, tensions may rise and new problems may occur but that’s part and parcel of owning and operating a business.
When these changes occur can be interesting. For example, if the founding parent is still in control, their view will be different to the second or third generation. If the founding parents have passed, as I experienced when selling a business last year, the dynamics can be many and colorful but one thing remains not negotiable and that is protecting the original family members and maintaining control and ownership of the family business.
Shareholder Agreement protects family business
One strategy for protecting the family’s ownership and direction is through a Shareholder Agreement. This legal document specifies ownership rights, obligations and transfer options. For example, a Shareholder Agreement generally contains a provision for the family business and its other shareholders to have the first option to buy back any shares if and when they become available. The Shareholder Agreement may even detail that the remaining shareholders must buy back shares from deceased owners’ beneficiaries at a predetermined price per share.
Other items a Shareholder Agreement covers
Other items a good Shareholder Agreement may cover so it protects the family members include guidelines to follow for:
- Owners or family member compensation,
- Medical disability or incapacity,
- Death, retirement or divorce of a family member,
- Financial hardship, and
A good Shareholder Agreement is only as good as the legal skills that go into putting it together and so consult legal and family business advisors with specialized knowledge and practical experience in developing such agreements. Additionally, include in the Shareholder Agreement how and why it is allowed to be changed as that’s the primary purpose of the document in the first place. Even those that drafted the original US Constitution recognized that things change.
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