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Growth Focus

USA

Succession, Possible Minority Shareholder problems and solution

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Problem

A minority Shareholder agrees to purchase a larger stake of the business at some time in the future.The successors issue is:

“Why should I pay a premium on my own contribution to the increase in value?”

Possible Solution

Agree either on

  1. A fixed value at the time of contract and a fixed price at Stage 2
  2. At Stage 2 value the business at an agreed market rate with a discount to recognize the purchasers contribution

Problem

What if there is a fall out with employees who have purchased equity in the business?

Two parties may have started out with best intentions but for whatever reason the situation has changed and the parties cannot come to an agreement on the best way forward. They are however locked together in an equity share arrangement.

Solution
Put in a good leaver bad leaver clause. A good leaver bad leaver clause is a clear mechanism that says employees must sell back equity at an agreed value. The clause may state that if they leave due to misconduct or solicit clients in their leaving (A bad leaver) the original vendor can buy back shares at $1
If they are a good leaver the original owner can buy back shares at at market value using a pre agreed valuation method.