In my experience, business owners who think about adding a minority shareholder are usually facing financial hardship or are trying to figure out a succession plan. Sure, this option has its share of pros, but the list of cons is just as long.
It doesn’t matter if your minority shareholder is your brother, your daughter, a long-time employee or your best buddy from high school, you must put a shareholder agreement in place if you want the relationship to work for everyone. This agreement will help you facilitate three of the key qualities of a prosperous relationship: communication, transparency and trust.
ONE. Communication
Your communication strategy should be open and proactive. Make a point to sit down with your minority shareholder regularly and have honest conversations about the business, personal and professional goals and any issues and considerations that may have come up since your last meeting. Speaking up and listening intently will minimize the amount of surprises and will ultimately give you more control over the company’s future and your exit strategy.
TWO. Transparency
Don’t let their minority status throw you off. These shareholders still hold a valuable stake in your company, and will expect to be kept in the loop. Keep them informed of any dealings that could alter their security or could result in feelings of distrust. You can reinforce your commitment to transparency in your shareholder agreement.
THREE. Trust
Hopefully you wouldn’t make a minority shareholder out of someone you don’t trust. But even though that trust is there on day one of your agreement, don’t take it for granted and assume that the trust is unconditional. It’s not uncommon for a business owner to fall victim to this trap and rather than insist on a shareholder agreement upfront, they decide to tackle the project later. Unfortunately, about the time “later” does come, motives have changed, actions and decisions are scrutinized and trust is lost.
Remember, even though a minority shareholder would own less than 50 percent of the company, without proper planning, even the smallest percentage can be a major thorn in your side.
Email Rea & Associates to learn more about the pros and cons of minority shareholder relationships.
By Dustin Raber, CPA, CMP (Wooster office)