As if business ownership is not complicated enough, adding multiple shareholders to the mix only complicates matters even more, as differing opinions, priorities, and visions can be the root of disagreement and conflict among shareholders. When relationships among these key persons break down, a company must have mechanisms in place for dealing with the dispute, or for enabling one or more of the shareholders to exit the business in a pre-determined manner, such as through an exit planning advisory service that includes a company valuation report for businesses like yours in Toronto.
How Shareholder Buyouts Evolve into Costly Disputes
At the root of every costly dispute in a shareholder buyout is the value of the business; when how much the business is worth has never been discussed and agreed upon by all shareholders, it can cause disputes to arise. This is because each shareholder likely has their own expectations regarding the value of the business.
The result of these disputes are devastating impacts on the business, as well on the relationships of the parties involved. In the process, shareholders become distracted and ultimately exhausted from preparing for and attending discoveries, meetings with lawyers and experts, settlement negotiations and arbitration or court proceedings. On a personal level, relationships are also affected, and ultimately, it is the business that suffers since shareholders are no longer able to devote sufficient time and attention to what’s essential – the company’s operations.
How to Prevent Shareholder Buyouts from Turning into Costly Disputes
More than arbitration and mediation proceedings, as well as transparent negotiations of a fair settlement, prevention is key to preserving business relationships and enabling a smooth transition in operations – even in the face of an impending shareholder buyout. This can be achieved by having an effective Shareholder Agreement that includes the requirement for periodic scheduled business valuations to avoid the time consuming and emotionally draining nature of a shareholder dispute.
With the help of an exit planning advisory service and the completion of an independent company valuation report for your business in Ontario, business valuation experts can help shareholders determine a fair and suitable price at which the departing shareholder’s shares should be acquired by the remaining shareholder(s), or redeemed by the company.
Why Shareholder Agreements are Essential to Business
In the event of a shareholder buyout, having a Shareholder Agreement in place can be the sole factor that prevents shareholders from spiraling into a costly and drawn out dispute. When effective, the Agreement addresses essential components of business partnerships, such as compensation, decision-making, entrance, exit, and return on investment.
Additionally, a Shareholder Agreement can provide shareholders with means for liquidating otherwise illiquid assets, such as privately held company shares, under certain circumstances. For instance, a buy-sell provision (or “shot-gun clause”) allows shareholders to offer to purchase each other’s shares, subject to the right of a shareholder who is either accepting said offer; or buying the shares of the offering shareholder at the same price, terms and conditions offered by the offering shareholder.
Company Valuation Reports as the Key to Successful Shareholder Agreements
Taking into account the company valuation, as well as the individual shareholdings, the Shareholders Agreement should provide a definition of value, such as fair market value or fair value, to set out the process and timing for obtaining an independent company valuation report. Shareholder Agreements typically stipulate the necessity of an annual or bi-annual valuation of the company, to be prepared by an independent Chartered Business Valuator (“CBV”). The resulting independent business valuation then provides the basis for new shareholders to buy-in into the business, as well as for the exit planning, measurement of existing shareholders’ return on investment; insurance needs and estate planning etc.
By committing to a formal independent business valuation, shareholders can discuss and agree on the value of the business early on, which prevents disagreements regarding the company’s worth. In the event of a shareholder buyout, the company’s value will have been addressed, thus eliminating a major issue of disagreement in the exit process. As a result, shareholders can expect a more meaningful return on investment, as reaching an agreement on the company valuation early helps parties avoid a costly, time-consuming, emotionally draining, and potentially devastating shareholder dispute in the future.