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Four reasons why a shareholder agreement is essential to your company's survival

08.09.18

Although there is no legal requirement to have a formal shareholder agreement, it’s a good idea for any company with more than one shareholder to have one, as it reduces the potential for conflict between shareholders, helping the company run smoothly and profitably. It also outlines shareholders’ rights, privileges and obligations, and includes the foundation of how to set up, manage, and run the company. Here are four other key benefits a well-drafted shareholder agreement provides:

  1. A shareholder agreement outlines decision making considerations e.g., how you will manage the company and how you can appoint the board. By identifying and listing matters that need unanimous approval, minority shareholders will have a say on important issues.
  2. A shareholder agreement prevents shareholder disputes and addresses exit strategies if conflicts arise—and provides a road map for a resolution. A key element of a shareholder agreement is a buy-sell provision, aka a buyout agreement. It is a legally binding contract between shareholders that stipulates the right or obligation of one shareholder to buy the shares of another shareholder when certain events occur.
  3. A shareholder agreement provides the framework for restrictions on the transfer of shares by addressing all possible triggering events—the good, the bad, and the ugly—sale, retirement, death or disability, divorce, termination, or bankruptcy—so that everyone understands what happens in any given scenario. You need to tightly define value or consideration paid when various triggers are met. This provides stability, enabling the company to withstand uncertain times with confidence. Loose definitions or scenarios not covered by the agreement are the source of many shareholder disputes—wasting time, effort, and money.
  4. A shareholder agreement also deals with the financing of the company and addresses how to raise future monies while demonstrating business stability to potential investors and partners.

If you are a business owner with more than one shareholder, make the investment in a well-drafted shareholder agreement. As shareholders will always have disagreements and not always see eye-to-eye, by setting out shareholder expectations you can then focus on what’s important: the profitability of your business.

Topics: manufacturing

Do you want to receive top dollar for your business? Do you want to make your business irresistible to a potential buyer? Looking for a stress-free retirement? If you find yourself answering “yes” to these questions, it’s time to take steps to create a transferable business.

The first step? Get a business valuation and find out what your business is worth. More often than not, business owners are surprised their businesses are worth less than they thought. A business valuation expert can give you an accurate picture of your company’s worth, and help you see how its performance compares to other companies in the same or similar industries. Here are five things you can do now to make it more easily transferable later:

  1. Reduce the risk of high owner dependence. The overall value of the company decreases if owner dependence is high. One way to avoid this is to transfer the owner’s knowledge of the company’s products to others in the business, enabling a more profitable and efficient transition.
  2. Attract, keep, and retain key employees. You can increase your company’s value if employees are committed to remaining with the company after a sale. Furthermore, skilled employees bring stability to a business, and save costs and time on retraining and hiring.
  3. Put recurring revenue agreements in place. This will increase the value of your company as it takes pressure off a new owner as they acclimate to the business as it provides a guaranteed revenue stream during new business pursuits.
  4. Identify cost-cutting strategies and streamline processes to improve efficiency and maximize profits.
  5. Monitor industry activity and trends within your industry and find opportunities to grow your business. This research can help you determine what potential buyers value in a company.

If you wish to identify ways to make your business more transferable, contact Seth Webber.

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Five steps to maximize the transferability of your business

All business owners need to consider a business valuation, ideally updated annually. A current business valuation is important for your company’s financial health as it can:

  • Give you an accurate picture of what your company is really worth — and how transferable that value can be — this provides a realistic picture of your company’s value should you decide to sell. It also provides a window into your ability to grow the business and how much money a bank would be willing to lend to support that growth.
  • Help you to plan for a faster sale — proper planning delivers more lucrative and successful sales of small businesses, as it gives a business owner time to increase the company’s worth before the sale, and to sell quickly.
  • Protect your family if something happens to you. John Warrillow, founder of The Value Builder System, writes that illness is the number one event that forces business owners to sell. A business valuation analysis can identify ways to create a more transferrable business in the event of illness or death.

Overall, a business valuation professional can provide you with an exact value of your company and help you develop a long-term plan to increase its value. Valuation strategies can help you increase profitability by helping you:

  • Identify prospective opportunities for sales growth
  • Implement cost-cutting strategies that maximize profits
  • Increase employee retention and save money on hiring and training
  • Develop systems and processes to increase the odds of a successful transition to the new owners, whoever they may be

If you or your client is interested in increasing a company’s value, please contact Seth Webber 

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Why a business valuation analysis is important to your company's value

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