Master the Process and Avoid the Trauma
Many owner-managed businesses do not implement buy-sell agreements or other owner agreements. This becomes a problem when an owner's status changes. Often the owner realizes cash from the business primarily through compensation (as opposed to dividends). When the owner's change in status causes a change in compensation, there will be issues regarding that owner's interest. If there is not an effective agreement in place among the owners of the business, these issues and the difficulty of their resolution can cause significant trauma to the business.
If our goal is an effective owner agreement, then it must be one that is understood and accepted prior to and during its term. This is accomplished by using the same procedure that produces a written plan. The planning process is well-known: set reasonable goals, implement action plans, monitor progress through milestones, evaluate the experience of implementing the plan, and revise continually as needed. The planning process should be documented and that writing reviewed by all parties. A written plan created by this process is the basis for the creation of an effective owner agreement. Given a written plan created through this procedure, the lawyer can create an enforceable legal document that will meet the requirements of an effective agreement.
What occurs in many businesses having an owner agreement is that they later find the agreement is ineffective. In these cases, the business employs a lawyer to provide a written document. This is done without detailed discussion among the owners, and the lawyer fills in the document with what the lawyer conceives is appropriate. When the agreement is tested, that is to say when the status of an owner changes, the effect of the written agreement may not be appropriate for the needs of the parties. This may be because the application is unfair or unexpected, but if it is essentially unacceptable to one or more of the affected parties, the agreement will not be honored. A party adversely affected by an agreement, especially if the effect is unexpected, will not comply with the agreement. The resulting dispute and potential litigation will be detrimental to the business. The essence of an effective agreement is that the parties will honor the provisions of the agreement.
There is widespread acknowledgment of the benefit of having effective owner agreements in place, therefore it is important to identify the primary reason why so many businesses do not have any owner agreement in place, not to even consider how many of those agreements in place are effective. My experience as a business consultant tells me that the primary reason is that there is no procedure in place to produce written planning which is the basis for a written owner agreement.
Most importantly, business owners who can create an effective owner agreement by basing that creation on a written plan can, through utilization of a similar process, deal with issues involving inappropriate effects of a well-intended and appropriately executed owner agreement. If the agreement is not perfect, the process used to create the agreement can also be used to repair the agreement.
Implementing and maintaining a written planning process is difficult, and that is why many businesses do not have an effective owner agreement. By mastering the process used to create a written plan, an effective owner agreement can be implemented and maintained.