Picture this: You are running a successful business which you started with someone else. When you commenced the business you weren’t sure it was going to succeed but you thought the idea you had would fly and you had nothing to lose.
Guess what: Your hunch proved to be right, there was a market for your idea, customers were prepared to buy from you and the business started to generate some decent revenue. Pretty soon you had to scale the business by finding premises and employing staff, you had to put processes in place and obtain funding.
You and your business partner were now spending a lot of time expanding the business due to the demand for your products.
Then comes the serious stuff: Your Accountant has been a great help providing advice on how to handle the growth of the enterprise. Initially you started the business in your own names but have now moved the business into a company structure and operating through an entity provides asset protection and separates your personal affairs from that of the business.
At this point: Your business due to its growth is now worth a lot of money, it has a sale value and other organisations or people can buy it. When you went into business you never thought it would become this big but it has. When you started the business you did so on a handshake with your business partner because there wasn’t much at stake but now there is. A handshake will not do going forward.
To protect all concerned you need an exit agreement.
What’s an exit agreement?
This is a legal agreement that states how a departing business partner will be paid out for their share of the business. A share in a privately held company is difficult to sell therefore the exit agreement anticipates this and prescribes a formula for how the remaining owner will fund the pay out of the other person.
What should I include?
A good exit agreement must anticipate the main reasons a business partner may want to sell their shareholding and also define the events that will lead to them being asked to leave. Common reasons are divorce, bankruptcy, fraud, disappearance, suicide, voluntary reasons and involuntary ones, like critical illness or serious accident.
So are you the business owner facing this situation? If so what are you going to do about the gap in your ownership? Usually a lawyer that specializes in this area will be able to draw up a good exit agreement. It is best to do so now while everything is going well because it becomes a whole lot harder when business partners are not talking to each other or an exit event occurs.