EXIT STRATEGIES FOR SHAREHOLDERS PT 1

What Every Business Owner Needs to Know If You're Working With Someone Else

By Delzad Kutky

Plan Ahead of Time Before Your Money is Tied Up Indefinitely

If you own shares in a business or you’re looking to buy shares in a business, you need to know what your exit options are. Without careful planning and appropriate agreements entered into ahead of time, your investment could be trapped in a business that you no longer want to be involved with, and it can take months or years to resolve. This article series will mention different forms of exit strategies that you may consider including in a Shareholders’ Agreement.

Why does anyone need an “Exit Strategy”?

In most cases, shares of a private corporation cannot be sold without consent from the board of directors of that company. In many small- to medium-sized corporations, that means one or two people can block you from selling your shares and getting your money out of a business. We know that if you’re planning on going into business with someone else, it’s because you trust them, you want to work with them, and you believe in the future of the corporation. Why else would you put your hard-earned money at risk by investing in that corporation?

We also know that not every business grows according to plan and relationships between business partners can change. Whether you need to sell your shares because you don’t believe in the business anymore, or you don’t want to work with the other shareholders anymore, you need an exit strategy to ensure you aren’t trapped and waiting for someone else to agree to let you out of the business.

For example, your relationship with a business partner may have soured, and you want to sell your shares to get out of business with them. Some people may agree to let you sell your shares to avoid conflict or to get out of a bad business relationship quickly. Unfortunately, others may try to take advantage of the situation by refusing to consent to the sale of your shares and holding your investment hostage. Whether it’s because they think they can use the situation to leverage a good price to buy your shares for themselves, or because they just want to be petty, the result is the same: your capital is trapped in a business with someone you don’t trust anymore. 

So what is an “Exit Strategy”?

An exit strategy is a plan and procedure that gives you the opportunity to get out of a corporation even when you have a combative business partner who wants to keep you trapped for leverage. A well-drafted Shareholders’ Agreement can contain one or more exit strategies that may let you force a sale of your shares or even force a sale of other shareholders’ shares.

Different exit strategies may have different outcomes. For example, if you proceed with a Buy-Sell Clause strategy, you may end up forcing other shareholders to buy you out of the business or you may end up being forced to buy them out, but either way you aren’t forced to work with those people anymore. Alternatively, you may only want to sell your shares, and you force the corporation to buy your shares back at a pre-determined price.

Concluding Thoughts

Stay tuned in to this series of articles to learn more about different exit strategies, how they work, and risks to watch out for. Regardless of the strategy, the key to a successful exit is ensuring the procedure for it is carefully written. If any part of the plan is unclear, there’s a risk that you and your soon-to-be former business partner may have different ideas of what the procedure really is and there’s room for conflict to grow. Stay tuned for further articles in this series to learn more about different types of exit strategies, how they work, and risks you should look out for.

It’s also important to keep in mind that if you want to have an exit strategy in your back pocket, it usually needs to be agreed upon between shareholders of the corporation. By the time a dispute arises, it’s usually too late to get one or more other shareholders on board with your desired strategy. The best time to have your exit strategy in place is when you are buying into the business and the second-best time is right now.

The lawyers at SorbaraLAW are ready to assist you with planning, negotiating, and preparing a Shareholders’ Agreement that suits your needs.