MOVING FORWARD: DOCUMENTING RELATIONSHIPS

Once your business has its infrastructure in place (see my earlier posts), the next important objective is to document every relationship with a signed agreement. In this post, I will build on the foundation we’ve previously established with the four-tab, business plan notebook. You’ve already generated the policies and procedures for each function of your business. Now it’s time to examine what’s involved in being an owner and the exact terms for every other relationship within the business. Get out a fresh notebook and let’s begin.

Ownership Agreements

In much the same way that we’ve created the business plan, we are now going to produce a separate notebook dedicated to each contract that your company makes. This notebook will open with your ownership agreements.

First of all, you need to know the correct terminology for every type of owner relationship. If your business is a corporation, you and any other owners are called “shareholders.” In turn, if you choose to have a partnership, you are then deemed “partners.” Finally, if you decide to have a limited liability company, you and your co-owners are viewed as “members.”

Although the terms may differ, the idea behind ownership agreements remains the same. Typically, these kinds of contracts include restrictions on what you can and cannot do with your ownership. In other words, the agreement makes the process of transferring ownership to other parties crystal clear.

There are two categories for transfers:

 Voluntary transfers are sales or transfers of stock in your business. This act is done willingly and the result is that the business has a new owner or owners.

Involuntary transfers occur due to circumstances that are often beyond an owner’s control. Death, divorce or bankruptcy could cause the need for ownership to be transferred, even if one player did not intend for this outcome to happen.

While the concept of transfers is simple, if there is no written agreement, you could find yourself in a lot of trouble down the line. So it’s imperative that you and your co-owners write down the exact specifications for any transfers going forward.

Voluntary Transfers

Voluntary transfers usually have one of three different structures:

•  Owners can transfer their shares at any time. But they must give the right of first refusal to the business and other stockholders.
• Owners are not obligated to provide the right of first refusal to the current owners. They just need to inform the other key players in the business of this decision. Therefore, it’s simply a notice requirement.
• Owners may not transfer their shares in the business under any circumstances whatsoever. It may be possible to sell them back to the corporation. But if the company doesn’t want these shares, the owner is stuck with them.

Involuntary Transfers

Involuntary transfers also need to have stipulations within your ownership contract. To do this, the contract can include language that says in the event that the stock is transferred involuntarily by divorce or by order of the court, for example, the shares are proclaimed to have no value. This situation is what’s called a “poison pill.” Basically, it means the shares can be taken through an involuntary transfer, but they are then worthless.

An involuntary transfer due to an unexpected death is a bit more complicated. I find the simplest way to handle that scenario is that the corporation takes out an insurance policy on the owners. If one of the partners dies, the insurance money pays the business. Those funds are then passed to the surviving spouse to buy out that individual from playing any type of role in the company. This is called “key man insurance” and it’s a way for the company to maintain its control even after an owner dies.

In addition to the procedure for voluntary and involuntary transfers, the ownership contract should also define the distinct responsibilities of each of the main people who have shares in this business. Basically, nothing should be left unsaid.

Other Relationship Agreements

Now that you have every detail written out in your ownership contracts, I want to stress that this notebook must also include all of the other relationship contracts associated with your business. In no uncertain terms, your company must create a written agreement to accompany every single relationship that exists for its benefit.

Some prime examples of these agreements include:

·        The relationship of your business to your landlord;

·        The relationship of your business to your bank;

·        The relationship of your business to your vendors; and

·        The relationship of your business to your employees.

To put it simply, any relationship that could otherwise rely on a handshake or a verbal agreement needs to be written out and signed so that there are never any misunderstandings. This way, you’ll always have straightforward documents that spell out how your business operates in relation to other parties.

Next time, I will explain how the ownership of your company should be allocated. In essence, it’s important to have a procedure in place to figure out who has the final say in making important decisions about your small business. I’ll tell you the best way to approach this crucial concern.