Disputes between owners of a business can be some of the most difficult to resolve. Part of the solution is to document the ownership of the business from the beginning of the relationship. I am sure you have heard someone say: “It is easier to do it right the first time than to try to fix it when an issue arises.” There is a lot of truth in that statement.
When a new relationship starts everyone is excited and optimistic and that is just the time to document the ownership of the business. Whether it is an operating agreement or a shareholder’s agreement, memorializing the ownership interest and the rights of the owners provides a roadmap to resolving disputes and minimizing expenses if a dispute arises. If the excitement and optimism fades because the business is not having the success the owners thought it would, tensions can rise and the willingness to compromise may fade. Now the failure to document the business’ ownership could result in significant damage to the value of the business, the business being unable to move forward because of a deadlock, litigation, or in extreme cases the court ordered dissolution of the company.
Document the ownership and create a document that will guide the company through the tough times and ultimately to success. What needs to be addressed? Some of the most important items, the number of units/shares held be each owner, minimum voting requirements, distributions to the owners and drag-along rights in the event of a sale of the business.
If, however the business is successful having the ownership documented will make a sale easier. Lack of clarity in the company’s ownership structure can scare off potential purchasers. So, take some of the stress out of the operation/sale of your business and document its ownership!