Going into business with a parent, child, sibling, in-law, or cousin both demands and assumes a certain level of trust. But, you need more than good faith and a firm handshake. Future disagreements and unexpected events can occur and tear apart businesses, and relationships as well. A shareholder’s agreement is almost a must in any business when more than one person is an owner. Just because your fellow shareholders are family is not a reason to assume this ‘good practice’ does not apply to you.
How do you avoid splitting up a company and deciding who gets what in the heat of battle? You may not be able to think in a level-headed manner when screaming is at the highest decibel and doors are being slammed. What is better is to plan for the worst cases, hoping they never happen. The wording and terms of shareholder agreements can vary greatly, but they most commonly address the following issues:
1) Who may or may not own shares and what happens if shares intentionally or unintentionally fall into the “wrong” hands due to divorce, death, credit problems, lifetime transfer or otherwise.
2) Events permitting or requiring a sale, such as leaving the company to pursue another profession, retiring, being disabled, funding estate taxes or getting divorced from a family member.
3) The price for which shares can be bought or sold and how that price is determined (fair market value given minority shareholder discounts, etc.) and how that price could be modified over time.
4) The payment terms, including down payment, length of note and interest rate.
Many shareholder agreements give the company or existing shareholders the right of first refusal to purchase the shares. A shareholder agreement legally determines how to handle a host of what-ifs.
While it may be uncomfortable to go through drafting legal documents between family members – remember the adage, better safe than sorry!