Upsize is a magazine with a single mission: to help Minnesota's small-business owners build bigger and more profitable companies, and to connect CEOs with the people, products and ideas they need to grow.
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HOW TO Legal Solid fers of ownership in a company to third parties. Transfer restriction can be either absolute (for example, no transfers are permitted ever without the consent of the other owners), or transfers may be limited by right of first refusal or other similar restriction. foundation SPELLING OUT RULES AT THE START CAN LEAD TO BETTER BUSINESS 1. IF YOU'VE STARTED a business, perhaps you have heard about buy-sell agreements. But you might not be certain what they are all about or why you should allocate some of your limited resources to one when there are so many other things that require your immediate attention. Despite the common notion that you can defer a buy-sell agreement until you have the resources to devote to the process, you should not put it off. Many good businesses have been disrupted or even failed because own- ers did not properly define their relationships. Consider the following when putting together a buy-sell agreement to help ensure success of your business: Transfer restrictions. A buy-sell agreement (sometimes called a shareholder agreement, member control agreement, or something else) has the primary purpose of ensuring continuity of ownership. When a business is started, partners agree to do business with each other and not with others for specific rea- sons. Each owner likely brings certain expertise and experience that is not easily replaced. Also, personalities of owners are critically important for business success. Therefore, one of the most important functions of a buy-sell agreement is to restrict trans- 26 Purchase options. Most often when a busi- ness is started, everyone is in perfect alignment regarding the business and its direction. How- ever, feelings change over time, and life events could also affect an owner's ability to continue with the business. A buy-sell agreement fre- quently includes the option (or obligation) to buy out an owner upon the occurrence of certain events, including death, disability, retirement, termination of employment or termination of active engagement with the business, insolvency or bankruptcy, and when transfers of owner- ship are attempted in violation of any transfer restrictions. It often surprises people when they learn that the law does not require a business owner to be actively engaged in day-to-day operations of a business. The issue usually arises when an owner ceases or slows down his or her involve- ment with the business despite expectations of fellow owners. Without a purchase option in a buy-sell agreement, an uninvolved owner retains his or her rights to participate in any owner votes and share in the profits of the company. Valuation. In order for a purchase option to be effective, there needs to be a way to value the ownership interest being purchased. There is no one right answer on how to do this, although common methods include a stipulated value, a formula for determining value, and an outside appraisal. Operation and management. An often over- looked topic for a buy-sell agreement is the operation and management of a company. The statutes under which a company is created gives one some default rules for how the company will be governed; however, those rules may be modi- fied by agreement, and it may be appropriate to modify those rules to meet owner expectations. 2. THE FOLLOWING IMPORTANT STEPS for UPSIZE ONLINE THE GROWTH GUIDE 2012 a strong business foundation can also reduce chances of fraud down the road. Select partners carefully Too often, it seems, entrepreneurs choose strange bedfellows when going into business, based on friendship, family connection or casual association. When select- ing a partner, thought should be given to the role that each person will play and contribution that each can make, but also to compatibility. Busi- ness partners often spend more time together each day than spouses do, sometimes under pressure and stress, and a business divorce can be more expensive (and more emotionally charged) than the dissolution of a marriage. Write everything down In the enthusiasm of starting a new business, the last thing entre- preneurs typically want to do is engage in the difficult process of negotiating terms of a com- prehensive agreement among the owners. Yet business partners who start out enthused and agreeable can later end up in court with irrecon- cilable differences. Whether the business is organized as a partner- ship, a corporation, an S-corporation or a limited liability company, a written agreement at the outset of the relationship that covers key issues and potential problems is essential. Open access to info Trust begins to erode in a business relationship when one partner has sole control of the finances and limits the other partners' access to information. Even if nothing dishonest is taking place, suspicion and conflict frequently ensue when an owner has reason to believe that information is withheld or manipu- lated. Each partner should have ready access to all business and financial information. Protect property As new products, services, customers, trade secrets or other intellectual property rights are developed by a business, it is crucial that steps be taken to protect and preserve these assets. Such steps may include confidentiality and non-disclosure agreements, licenses, registrations of patents, trademarks and copyrights, non-compete agreements with owners, employees, or contractors, and similar contracts and arrangements. www.upsizemag.com