The addition or removal of a principal in any business, especially one with fewer than 500 employees, is one of the most important events in a company’s development. How well it is accomplished, both from a moral and a financial perspective, often dictates whether the business will succeed or fail. For this reason, every business owner should know two things: (1) such change is inevitable; and (2) the question of success or failure hinges upon advance preparation.
First and foremost, it is imperative that if a business has more than one owner, the principals should create and sign written agreements detailing:
- When and how any principal can go about leaving the company;
- The amount of money (either stated outright or derived through an agreed formula) the departing principal is to receive, if any;
- How a buyout is to be structured;
- Post-separation obligations;
- The conditions for bringing on a new principal.
When the subject of Buy/Sale Agreements or Stockholders’ Agreements comes up, most people envision a 50 page single spaced contract written in Latin by an attorney at the cost of tens of thousands of dollars. Fortunately, unless we are talking about a Fortune 500 company, this is simply not the case. A skilled attorney will work with the company’s principals to create an agreement which reflects their beliefs and company culture and, most importantly, is written for the non-lawyer.
The necessity for these documents is especially true where the principals are family members or close friends. Where money is concerned, few things preserve a relationship like a clear written agreement prepared well in advance of any issue that may arise.