10 critical factors you can’t overlook in a shareholder or partnership agreement

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10 critical factors you can’t overlook in a shareholder or partnership agreement

The devil is often in the details when it comes to business arrangements, especially when you’re crafting a shareholder or partnership agreement. Every piece of information needs to be carefully discussed and agreed upon. Both sides have to believe the terms and conditions are mutually beneficial; otherwise, they may view it as unfair and grow to resent the agreement.

But how can you ensure all the details are squared away and thoroughly accounted for? Below, 10 members of Business Journals Leadership Trust discuss the factors that shouldn’t be overlooked when drafting a shareholder or partnership agreement.

The Business Journals

1. A provision for the divorce of a partner
I would have a provision for partners who get divorced that requires mandatory redemption and explicitly defines the valuation methodology. The last thing you want is a new partner who’s the ex-spouse of a current partner. If the partner owns less than 50%, I would require a written provision for a 40% haircut for lack of marketability and control. – Joseph Gordon, Gordon Asset Management, LLC

2. A ‘failed state’ analysis
You need to answer two questions: What are the possible reasons the partnership may fail, and how will you handle each situation? Also, discuss the specifics of your roles upfront — not just titles, but the actual work you will do. Agree upon the frequency of basic conversations on financials, employees, clients and anything else that is important to each of you. – Aviva Ajmera, SoLVE KC

3. A plan for the worst-case scenario
The shareholder or partnership agreement must account for unplanned developments. Financial obligations, labor division, sale decisions, market changes and even mortality must be considered when constructing the agreement. While it can be uncomfortable in a new partnership to discuss such matters, failure to do so can be destructive to your business. – Jeffrey Bartel, Hamptons Group, LLC

4. Share valuation
Consider the valuation part of the contract. If you have to execute the agreement, how will the shares be valued? It can quickly turn a simple agreement into something more complex and is something that should carefully be considered in the early stages. – Wesleyne Greer, Transformed Sales

5. Operational control
Avoid a 50/50 partnership if possible. Every company needs accountability, and there needs to be someone with operational control. As someone who started my company with a partner, I know that partners often have a different vision for the direction of the company, and a 50-50 split will result in no action being taken. Eventually, resentment builds, which often leads to a dissolution of the venture. – Matthew Halle, Lead2Growth

6. The desired result
What is the targeted result of the agreement? If the document is drafted with the result in mind, devilish details can be considered and constructed in a way that benefits the ultimate goal and all parties involved. – Rachel Namoff, Arapaho Asset Management

7. The buy-sell agreement
The buy-sell agreement is a document that identifies the value of the business and includes predefined milestones that are agreed upon by both parties. It allows you to not have to worry about things that you don’t want to think about while you’re still actively engaged in a partnership. You should begin with the end in mind. – Jack Smith, Fortuna Business Management Consulting

8. Net versus gross revenue calculations
Net versus gross revenue calculations can be a critical component within partnership agreements. These details could be overlooked if the agreement is not clear on how revenue is calculated. – Jessica Hawthorne-Castro, Hawthorne Advertising

9. Disability coverage
Just a few of the details you need to include are rules and responsibilities, exit clauses, voting power, insurances, agreements, and corporate structure. What happens if one of you becomes disabled and cannot work? Do you have key man insurance to cover that, bring in a replacement and pay for both their salary and yours while you’re disabled? What if your partner wants to sell to someone else — is that allowed? – Jean-Paul Gedeon, JPG MEDIA

10. An exit strategy
Often when entering a partnership we focus on how things will go if everything goes to plan. Entrepreneurs are optimistic by nature. Consider how you will handle the partnership if things do not go according to plan. Exit strategies will give you confidence — you’ll know that while you’re going to work your hearts out, if things do not go according to plan you still have a pathway forward. – Jared Knisley, Fizen Technology

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