There are many different ways to structure arrangements tied to succession planning and selling ownership shares. When selling ownership shares as part of your planned succession process, five key considerations must be covered:

1. Your needs.
2. The needs of your fellow shareholders.
3. The needs of your key employees.
4. The best interest of the corporation – i.e., the sum of #1, #2, & #3 above [and other stakeholders, including clients, suppliers, and allies].
5. The buyer’s needs.

Most people who complete a succession plan are surprised by the amount of work required and the amount of time it takes to address all of these five considerations. Most people are surprised because they failed to invest time thinking in advance. Instead of thinking and planning in advance most people back into succession activities because some crisis has caused them to have to back into the change.

The better approach: spend time up-front considering the above five things. And, invest time regularly – say, one day every year – considering the above five things. This will ensure they have been covered when the time for succession action arrives. Also, this will remove many problems both at the time of succession and prior to that time. The commitment to invest time regularly to consider the above five things is a commitment to strategic planning and a commitment to understanding the people you rely on for your business success. That is time well invested.

You and other stakeholders will have personal needs: self-actualization, creating things of value, etc. We will not delve into those needs here.  Here, we will be addressing your money needs and specifically how to best ensure those needs are met…how to maximize the likelihood there will be no surprises…how to provide flexibility.

Share Purchase & Sales Agreements: Main Considerations

The Share Purchase & Sale Agreement will be designed to confirm the rights and obligations of the seller [or sellers] and the buyer [or buyers]. Those rights and obligations will address four main considerations:

• Interests: the seller’s interests and the buyer’s interests
• Money: in most agreements, most of the seller’s and buyer’s interests are tied to money
• Risks: both parties are concerned about covering risks to the extent possible and practical
• Timing: the rights and obligations covering interests, money, and risks will have set time deadlines and limits

NOTE: To a large degree, the seller’s interests and the buyer’s interests are opposed. The seller wants a high price; the buyer wants a low price. The seller wants to transfer as much risk to the buyer as possible; the buyer wants to assume as little risk as possible. Timing desires also differ.

Links to articles about ‘People’s Interests’…   Link1   Link2    Link3

The Way to Negotiate:                     

• Recognize interests will often be opposed
• Focus on fully understanding your interests and the buyer’s interests…observe carefully, listen well, think before judging
• Think constantly about ‘options’…rather than saying “No” to the buyer’s interests/requests say “Let’s see if we can come up with a middle-ground solution” [Seek alternative ways of covering issues…think about ‘Options’]
• Seek shared interests, paying close attention to whether or not the buyer actually wants to complete the purchase [i.e., Is the buyer’s appetite to purchase as least as strong as your appetite to sell?]
• Complete agreement on small, easy-to-get-done pieces…build momentum into the process
• Pay attention to the pace of the negotiations…ideally, momentum builds and sustains
• Working with the buyer directly, complete agreement on the ‘commercial terms’ before taking the deal to your lawyer for formal papering

A Sampling of Options [options in the general sense and Options in the investor sense]

Escrow: Shares and money can be held by a trusted 3^rd party. Often, that third party is a legal firm that holds the asset in escrow. Here’s an example of how escrow can provide middle ground: Say the buyer cannot afford full payment on the day the deal is to close. This exposes the seller to risk – Will I receive the remainder of the payment? In reaction to the risk, the seller usually does not want to deliver all the purchased shares to the buyer. Possession of the shares has legal implications…maybe possession is 90% of the law…even if it isn’t 90%, possession of shares is important. So, the seller wants to hold back shares until full payment for them is received from the buyer. On the other hand, this exposes the buyer to risk - How do I know I will receive those shares? One solution is to place the shares under control of a trusted 3^rd party…a legal firm. One way to accomplish this is to create an Escrow Agreement. It contains the details of what needs to happen [payment buy buyer] in order to release the shares [to the buyer]. The buyer, the seller, and the legal firm sign the Escrow Agreement.

Puts & Calls: People – known in law as a Person – can own shares of a corporation. The corporation can also own some of its shares: when the corporation owns the shares they are called Treasury Shares [or Treasury Stock]. When you boil it down, a person owns shares for one reason; a Person owns shares because he or she thinks the shares will be worth more money in the future than their current cash-in value. While the person thinks that the shares will be worth more in the future, the person also knows there is risk…the shares could be worth less in the future. To protect against the downside the owner of the share can buy an Option known as a Put. The Put provides the owner the right to sell the share back to the corporation at a known price. Conversely, people who want to have the right to buy a share at a known price can buy it today at the market price or they can buy an Option to Call the share in the future at a known price. These financial derivatives build optionality and stability into the financial markets.

Privately held companies do not have the liquidity enjoyed by larger publicly-traded corporation shares. In layman’s terms – there are few buyers and few sellers of private company shares. So, in the private sector Puts and Calls are arrangements between few sellers [often only one] and few buyers [again, often only one]. Regardless, private-business puts and calls provide options and routes to middle-ground during negotiations. Here’s an example of how a put & call combination can provide middle ground: Say the seller maintains a minority shareholder position after selling shares to the buyer. There will be few buyers for the shares held by the seller, who is now a minority shareholder. So, a put option can provide the seller comfort – for example, the seller has the right to put his or her shares to the company for $100,000. At the same time, the buyer may want the right to remove the minority shareholder. This can be accomplished by providing the buyer the right to call [from the monitory owner] the share. For example – the buyer has the right to call the minority owner’s shares for $200,000. This places value range on the shares, $100,000 to $200,000. The seller would gladly accept $200,000 for the shares…but the buyer is not prepared to pay that price today…maybe in the future, but not today. The buyer would gladly pay $100,000 today…but the seller is not prepared to sell at that price today…maybe in the future, but not today. So, the put & call arrangement limits the risk for both parties while, at the same time, it provides both parties the ability to separate company at a defined price [if one party, in the future, wants to part company].

Vendor Take Back: Often, buyers do not have the money to make full payment for the shares. Rather than lose the deal because of lack of buyer-money, the seller can allow the buyer to defer some of the payment. In simple terms, the seller is loaning the buyer money. Usually, the buyer signs a promissory note, agreeing to pay a defined amount at a defined time deadline. To reduce the seller’s risk, these payments can be made in instalments. When this happens the buyer signs a series of promissory notes, each having a different time deadline for payment.

Creativity

Sellers and buyers must obey the law. That’s fair play. And, that’s the only boundary. Within that boundary sellers and buyers can get very creative…working to satisfy their individual interests and their shared interest to get a deal done.

Sellers and buyers need the help of professionals to get the deal done: at least, lawyers and accountants. Lawyers and accountants who deal with corporation law and small businesses see some amazingly bad things throughout their careers. They have witnessed a string of business people who lie, cheat, and steal from one another. They have seen failure to fulfil commitments, bounced cheques, employee sabotage, tax evasion, espionage, patent infringement, and a long list of other things that happen on the bad side of business. A career full of the bad side of business can sour a person. You will want to make sure that soured person is not the person you hire to help you create and close a Share Sale and Purchase Agreement.

Choose your allies carefully. And, work to build a relationship with the person who is buying your shares. Work to understand that person’s interests, desires, and needs. Work to find middle ground that satisfies your needs and the buyer’s needs. Obtain counsel from your professional allies, starting sooner rather than later. When it comes to working out the deal - work directly with the buyer to complete agreement on the major commercial terms before calling in your professional allies to finalize the details. Know what you are doing, plan each step, and oversee the entire process.

The sale of your business is too important to leave in the hands of 3^rd parties.

3^rd parties will not have your creative capability. 3^rd parties will not have your vested interest in getting a deal done, maximizing your money [within reasonable bounds], and minimizing your risks [within reasonable bounds]. Stated another way – 3^rd parties often tend to get entrenched while you are solution-oriented. Solution-orientation: that’s how you started the business, that’s how you ran the business, and that’s the best way to exit your business.