Agree how the arrangement ends before it starts
When an investor helps run a business, agree at the start how either side can end the arrangement, so an ending is orderly whenever it comes.
- Investing
- 3 min read
- Published
Every arrangement between an owner and an investor ends at some point. The business is sold. The owner wants full control again. The investor's part in running the business is complete. Someone's circumstances change. Sometimes the two sides simply stop agreeing.
The time to agree how the arrangement ends is at the beginning, when both sides are optimistic and on good terms. The same conversation held later, under pressure, is harder and more expensive for everyone. An ending planned in advance is usually an orderly one.
Name the ways it can end
Start by listing the ways the arrangement might end, and treat each one separately. The common ones are these.
- A sale of the whole business to a third party.
- One side buying the other's share.
- The investor's management role ending while its shareholding continues, or the reverse.
- An ending because one side has broken the agreement.
- An ending because of events outside either side's control, such as death or serious illness.
Each of these needs a different route. A single clause that tries to cover all of them will cover none of them well.
Separate the stake from the role
When an investor helps run the business, there are two things that can end: the investor's share in the business and the investor's part in managing it. These do not have to end together.
An investor might step back from the work once the business has a finance function of its own, and keep its shareholding. An owner might buy back the shareholding over time while the investor continues to carry a project the business needs. Write down how each part can end, the notice each side must give, and what happens to the work the investor was carrying, including who takes it on and how it is handed over.
Agree how a price will be set
If one side may buy the other's share, the hardest question is price. Agreeing a figure in advance makes little sense, because nobody knows what the business will be worth later. Agree instead how the price will be set when the time comes. That might be a method based on the accounts, or a valuation by an independent person whom both sides accept, or a combination.
Agree also who pays for the valuation, how long each side has to accept or challenge it, and how payment will be made. A method that both sides understand removes most of the heat from the moment it is used.
Plan for disagreement
Some arrangements end because the two sides can no longer work together. Plan for that too. Agree a sequence for resolving a deadlock: a formal discussion, then a fixed period to reach agreement, then a defined route if none is reached, such as one side offering to buy the other's share on terms the other may accept or match.
Planning for disagreement does not make it more likely. It makes it less damaging, because the business keeps running while the question is settled.
Keep the business running through the ending
However the arrangement ends, the business has customers, staff and suppliers who did not choose any of this. The agreement should protect the business itself. Who runs it during the notice period. Who may speak for it. How the reporting continues until the change is complete. How records, passwords and contacts held by the departing side are handed back.
Have each side's own lawyer draft and review these terms, because the details depend on the business and on the law that applies to it. The owner's job is to make sure each of these questions has an answer before the investment is made, and that both sides understand the answers in the same way.
An agreement that sets out how the arrangement ends lets both sides commit fully, knowing that the end, whenever it comes, has already been thought through.