A short YouTube presentation by Bob Gauvreau explaining what partnership and shareholder agreements are and what they should contain. He emphasizes (1) clear definitions of partner contributions and compensation to avoid resentment, (2) exit mechanisms such as shotgun clauses for buying out partners, and (3) buyout arrangements for death or injury often funded by life insurance to preserve business continuity.
Chapters
So I'd like to talk to you about what a partnership agreement or a shareholder agreement really is. So if you are looking at starting a business where you've already got a business in place and you're doing it with someone else. Right. Typically we refer to those as partnerships. Even if you own a corporation together, it's still considered your business partner because they've partnered with this business to help create it. Now, depending on the business structure, it could either be a partnership agreement if you're operating a partnership, or it could be a shareholder agreement if you're operating a corporation. Ultimately, they should include the exact same information, just with a little bit of nuances based on the type of company you're running. But what should be included in this. So the very first thing is we want to ensure that both partners are aligned with what their contributions are going to be and how they're going to be compensated. That's going to be the number one thing we want to have in there. Why do we want this? We want to make sure that everybody's working within the agreed parameters so that we can hold each other accountable and there's no resentment that one person isn't contributing as much as the other. Very well defined outlines of what's expected from everybody. Also in there, we want to throw in a few other areas. One, how would one of the partners or shareholders get out of this business? Or should circumstances arise that we need to. And a very popular way to get out of a business is called a shotgun clause. A shotgun clause essentially means that if I want to get out, I can make an offer to my partner or my other shareholder, let's say, for $1 million, and if that partner or shareholder that receives the offer thinks that's a great deal, I'll take the million dollars, then they're bought out. The opposite way, though, if I'm making that same million dollar offer, but it's for a $2 million business, that other shareholder can say, no, I'm going to buy you out for a million dollars. But what it does, it's a very quick set of circumstances where I can either propose to buy you out, or I can lowball you and you buy me out. It separates the shareholders and then the one person exits peacefully. Another element that we want to talk about inside a partnership or a shareholder agreement is the idea of what happens if one of the partners gets injured, can no longer work, or if, unfortunately, they pass away. How does that look? And a lot of times in the business, if you've got a partnership, if the one partner passes away, you don't want to automatically assume their spouse is your business partner. So typically what happens is there's a buyout arrangement where you use life insurance to essentially protect the that investment. So if a partner were to pass away, you have $1 million insurance policy inside the partnership or inside the corporation, that insurance money buys that partner out so that their family gets essentially the value of their contribution to the business, and then you carry on with the business as it is. Those are three main criteria inside a shareholder or a partnership agreement that just outlines, once again, how everybody operates while we're working together and how we exit peacefully, hopefully peacefully, unless someone passes away. But all of the structure is in place to make sure it's done at fair market value, and everybody feels like they're on the same page.
