What happens if your business associates and you have a falling out and no longer want to stay in business together?
Unfortunately in business – as in life – we are presented with changes and challenges we must deal with, which sometimes means that someone in the ownership group has to go. In most cases, this is handled with a “shotgun” clause in your agreement. It is a fast and efficient way to exit a business owner.
Here’s how it works:
Owner A presents Owner B with an offer to purchase Owner B’s interest. Owner B has 30 days to tender his or her interest for the dollar amount or owner B can buy out Owner A for the same offer. This means that if Owner A really wants to take over the business, then Owner A has to present an offer that isn’t going to be reversed and have his or her business interest sold to Owner B for the same price that was offered. This prevents low balling by one owner to another and usually has terms and conditions of a 100% cash buyout within 30 days. This clause, in my opinion, separates the wheat from the chaff. It avoids lengthy arbitration and allows owners who no longer wish to be in business together to have a course of action.
If the business has any debts outstanding, it is a good idea to have this covered off with the lending institution in advance. You don’t want to have sold your interest only to find out that the debt is still being guaranteed by the exiting owner.
The main point on these agreements is that it is like a business will in that you set it up while there are no problems. The cost to set these up is just part of being in business. You can save tens of thousands of dollars in legal fees, not to mention the mental wear and tear of being in a poor business relationship and the time spent with lawyers and arbitration trying to come to an agreement when problems arise.
Please seek advice on this and get your agreements in place with your legal advisors.
Clifford A. Wiegers, CFP, TEP, Ch.F.C., CLU, B.Comm.
Insurance Representative, Wiegers Financial and Insurance Planning Services Ltd.
Financial Planner, Manulife Securities Investment Services Inc.
The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc.
Mutual funds are offered through Manulife Securities Investment Services Inc. Insurance products and services are offered through Wiegers Financial & Insurance Planning Services Ltd. Banking products and services are offered by referral arrangements through our related company Manulife Bank of Canada.