In family-owned and privately-held businesses, bringing on new shareholders is a natural part of your company’s evolution. Whether it’s the next generation coming up the ranks or a loyal company leader whose time has come, the individuals you’ve identified as potential shareholders deserve to be set up for success. And in my experience consulting companies of all types and sizes, the best way to position the individual and the company for success involves clarity, preparation and communication.
Considering bringing on a new shareholder? Consider these important questions.
- Have you educated the potential shareholder on the upsides and risks of business ownership? When it comes to bringing on new potential shareholders, open and honest communication is critical. Take the time to ensure that potential shareholders understand the upsides of the potential for appreciation, as well as the financial risks involved. In many businesses, owners will need to guarantee debt with their bank and, for pass-through entities, owners will participate in paying income taxes associated with business profits. Help prepare new potential shareholders by giving them a thorough understanding of the benefits and risks associated with ownership.
- Has the business prepared administratively and legally for new ownership? In many cases, there are legal documents that you may want to update, including shareholder agreements, buy-sell agreements and corporate stock records. Now also may be a good time to review your company’s compensation and benefit policy for owners.
- Have you clearly defined the potential shareholders’ new role in the company? Business owners often play dual roles in the organization as both an owner and an employee. Take the time to discuss in-depth how the individual will operate in the day-to-day operations of business as well as in his or her new role as an investor or a stockholder. Many times, transitioning into ownership will mean a promotion for the individual. Be sure to give thought as to what this new role will mean to your existing team and be sure to communicate this both internally and externally.
Since all companies are unique, your specific planning should always be geared toward your individual circumstances. You’ll likely want to leverage external resources, including your CPA, to ensure all of your documentation is appropriately updated and that you’ve covered all bases when it comes to financial aspects of this new ownership on-boarding. By focusing on developing clarity, thorough preparation and open communication, you’ll be well-positioned to bring on new owners and continue your company’s legacy of success.
Contributed by John S. Stoner, CPA, CVA, partner and leader of RKL Business Consulting Services Group in the Lancaster office. John provides a wide range of business consulting services, including business valuation, financial analysis, litigation support, merger/acquisition assistance and business succession planning to business clients.