Shareholder Agreements and Estate Planning

Why do you bother writing a will? Why do bother preparing a power of attorney? You do these things because your parents told you to. You do these things to protect the people you care about. If your parents were business partners, they would have told you to prepare a shareholder agreement too. Not only does it protect you from your business partner, but it can protect you from your business partner's family. Most business partners don't really want to suddenly have to include their partner's spouse or executor in the business's affairs. Why wouldn't you want to be protected?

In the ideal world, business partners would always let cooler heads prevail, take the high moral road, and pay out the unhappy partner whatever they asked for and, of course, they would only ask for what is fair.

But life is not ideal and business partners have disputes. The divorce rate still lingers just under 40% (and doesn't include common law break ups). I don't think anyone is tracking business separations, but my litigating lawyer colleagues don't seem to be starving for work and I certainly have referred out more than a few disputes that went on to cost big bucks to resolve.

A shareholder agreement is usually far less expensive than a prenuptial or marriage agreement. Depending on where you are, they can be as cheap as $1200 after taxes. Naturally, if you keep changing your mind and or require substantial custom drafting, the price will go up.

Some basics you should know: do a web search on "buy/sell agreements" and you will learn far more than what I am posting here, but generally here are few things to get you thinking:

1 - When is this documents necessary (what are the triggering events) - death, divorce, bankruptcy, retirement, criminal convictions, disability, desire, or a take-over from a third party.

2 - What happens when the terms are triggered - first right to buy someone out? mandatory pay out from insurance? mandatory sale or purchase?

3 - How will the remaining party(s) pay for the buy out of the departing one - insurance, equity in the company? loans?

4 - How do you value the shares of the outgoing party - fair market valuation, most recent financial statements, a predetermined formula, book value, capitalization of earnings, or other?

A good agreement should be one that you and your partners have carefully considered with sound legal and accounting advice. "Do unto others as they would do unto you" rings stronger than ever in a good shareholder agreement.

What's holding you back from getting yours finalized?

If your lawyer is not helping you, ask yourself why not.