{{first_name}} Some of the best shareholder agreements live in the same place. It's a filing cabinet, in a folder marked "Legal," under the warranty for a pressure washer you sold in 2017.
It gets signed once, usually when the business is young, the partners are getting along, and nobody wants to talk about the hard stuff. Then it sits in that drawer for a decade while everything else about the business changes.
I once worked with a General Contracting Company that two partners had built together over fifteen years. When they started, they signed a shareholder agreement their lawyer put together. It was a decent agreement for a business that was worth very little at the time.
Then one of the partners died unexpectedly.
The agreement did require the company to buy back his shares. But the price was set by a formula that made sense when the business was small, and it was nowhere close to what the business was actually worth by then. There was also no life insurance to fund the buyout. So the company had to pay his family over several years out of cash flow, in the middle of losing a key leader.
His family felt shortchanged. The surviving partner felt squeezed. A relationship that had lasted fifteen years ended in lawyers' offices.
Nobody in that story did anything wrong. They just never went back and updated the agreement.
Five things your Shareholder Agreement needs to answer:
A good shareholder agreement answers one question in five different situations: what happens to the shares?
1. Death. Does the company or the surviving partner have to buy the shares? At what price? Where does the money come from? If the answer to that last question is "we'd figure it out," you have a problem.
2. Disability. This is the one most often missing. If a partner can't work for a year or longer, are they still a full owner? When does a buyout kick in, and how is "disabled" defined?
3. Leaving. If a partner wants out, how much notice do they give, how is the price set, and how is it paid? Is it all at once, or over years?
4. Disputes. If you and your partner can't agree on something big, how do you break the tie? Some agreements use a "shotgun" clause, where one partner names a price and the other must either buy or sell at that price. It sounds fair, but it tends to favour whichever partner has easier access to cash.
5. Selling to an outsider. If one of you wants to sell the whole company and the other doesn't, who wins? Can a majority force the minority to sell alongside them, and can a minority insist on selling on the same terms?
That last one matters when selling the business, way more than people expect. A buyer usually wants to buy 100% of the shares. If your agreement doesn't make that possible, a partner, or a partner's estate, can hold up the entire sale.
If you're the only owner, this still applies to you. It just looks different. Who runs the company if you can't? Does your will deal with the shares properly? Do you have powers of attorney in place so someone can sign for the business if you're in the hospital? The questions are the same even without a partner.
The Number This Week.
When was your agreement last updated, and is the buyout insurance-funded? Pull out your agreement and check three things:
The date it was last updated. Has anything major changed since then? Look for a new partner, big growth, a new valuation, or changes in anyone's family situation.
How the price is set. Is it a fixed number, a formula, or an independent valuation? If it's a fixed number from years ago, it's almost certainly wrong today.
How the buyout is funded. Is there life insurance behind it, and does the coverage match what the business is worth now, not what it was worth when you bought the policy?
If you can't answer all three without calling your lawyer, that tells you something too.
The Question This Week?
If your partner died tomorrow, who would own their shares by Friday?
If you're not sure, or your agreement is older than some of your trucks, book a free 20-minute call with one of my advisors. We'll help you figure out what questions to take to your lawyer and your insurance advisor.
This article is general information, not legal, tax or financial advice. Shareholder agreements, insurance and estate planning depend on your specific situation. Review yours with your own lawyer, accountant and insurance advisor.
Build Deliberately.
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Why am I writing this? I've spent over 20 years working alongside construction and trade business owners across Canada. My firm, N3 Business Advisors Inc., has helped hundreds of contractors buy, grow, value, and sell their businesses. I started my career as a teacher, and that part of me never left. So once a week, I put one lesson in your inbox, for free, to help you build a business that buyers line up for. If this was useful, pass it to one owner who needs it. If it wasn't, reply and tell me what you'd rather read about.
Nitin Khanna, CFA · Founder, N3 Business Advisors · Mastering the Business of Construction