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Owners of small to medium sized businesses want to realize the maximum value for their business interests. There are many risks preventing realizing maximum value for a business interest – most can be avoided by the implementation of an owner agreement.

Where an owner does not hold a controlling interest, there is the risk that the owner will not have control over the outcome of certain business transactions that may diminish or terminate the owner’s interest.

There is an increased risk of misunderstandings and conflicts. Where there is no written owner agreement, there are no defined rules for how the business should be run, how decisions are made, how profits are distributed, or how disputes are resolved.

The risk of failing to secure a loan or investment is increased. Banks and investors often want to see a comprehensive owner agreement.

What happens if one owner wants to leave, retires, becomes disabled, or passes away? The termination of an owner’s interest can happen through involuntary circumstances, such as death or disability, or through voluntary withdrawal for personal, family, or other reasons. Without an owner agreement containing buy-sell provisions, the risk of the remaining owners being forced into business with an uninterested or inexperienced third party (such as a spouse or child) is increased. Also, the risk of the business being forced into a costly and time-consuming dissolution process is increased.

Most businesses do not have an owner agreement among the owners because it is difficult to negotiate and implement an owner agreement among the owners of a closely-held business. Often the subject matter is difficult to discuss, and the pressures of operating an owner-managed business make it difficult to find the time needed to accomplish this task. The benefit of implementing an owner agreement for the owners of a small to medium-sized business is that for each owner the risk of not realizing the maximum value for the owner’s business interest is greatly reduced. This makes implementing an owner agreement worthwhile.

As with most complex and difficult tasks, it is best to use a segmented approach and address the various issues one at a time.

The issues that must be discussed and decided upon can be generally described. The business entity type of the business should be understood and described in terms of liability and tax consequences for each owner. The group of individuals or entities that own the business should be defined and appropriate restrictions should be put in place. The governance of the business, including who will make policy and who will be the chief executive, should be clearly specified. The events (triggers) that will cause one or more owners to transfer interests in the business should be defined. The procedure of the transaction occurring after each type of trigger, including funding and payment, should be provided for in detail. For each transaction, the determination process of the price of the transferred interest should be clear. If the business will act as a buyer in certain procedures, then the means of the business accumulating the funds for the transaction should be provided for in detail. A dispute resolution process should be described. The final task is the consolidation of the decisions into one coherent written document.

There should be a meeting of the owners and appropriate stakeholders to discuss each one of these general issues. For each issue there should be a separate meeting. The meetings should be held at regular intervals. The decisions resulting from the meeting discussions must be documented in writing. Where issues are technical or outside resources would be helpful, they should be utilized. The documented decisions resulting from these discussions, consolidated into one coherent document, will constitute a succession plan for the business.

The succession plan is the basis for the drafting of the owner agreement, a written document. Even though this is a written plan to which the owners have agreed, each owner must have separate counsel to review and advise each owner concerning the written owner agreement.

With an owner agreement in place there will be an agreed-upon rulebook for operating the business. This will prevent disagreements and help keep focus on business success. Moreover, the business will be protected from unexpected events ensuing a smooth transition if an owner leaves the business.

The owner agreement is a way to document the strategy of the owners to realize maximum value from their business interests. This is the Prior Diligence Strategy accomplished through Dynamic Planning. These concepts are explained in detail at the Owning a Business Substack at rickriebesell.substack.com.

One in four private sector U.S. businesses fail within their first year of operation. After five years, almost half (48%) have failed. After ten years, the failure rate is 65.3%. (According to data from the U.S. Bureau of Labor Statistics.)
Generally, businesses fail when they run out of cash. Cash flow is a metric indicating how money is coming in and being spent in a business. Marketing decisions influence how much cash comes into the business. Operations and growth decisions control how the money is spent. Good decisions made about cash flow will prevent business failure.
Small to medium sized businesses are often founded by someone with a good idea or skills that the marketplace demands at a point in time. Over time one person rarely possesses the knowledge and time to make all decisions concerning marketing, operations, growth, and changing business conditions. To make good decisions and prevent failure, there must be an owners’ strategy setting goals and actions taken by all elements of the business to accomplish those goals. Where the strategy changes or business conditions change, decisions affecting cash flow must be made by using the resources of the entire group constituting the business. The procedure of making decisions should be a group decision making process.
When decisions are written down, they constitute a plan. A business plan documents decisions about cash flow and establishes an operating budget for the business. As marketing, operations, and ownership changes, decisions made by the group decision-making process should be documented to all elements of the business as a part of or a revision of the business plan. This makes the planning dynamic.
Most small to medium sized businesses do not have a written business plan. This is the primary reason for the high failure rate. Business owners have a difficult time instituting a group decision-making process. Many owners plan by looking in the mirror and making decisions without the knowledge available in all elements of the business. Owners make strategy decisions and do not document those decisions. Where there is no business plan, goals are not articulated, and operating decisions are made without understanding the owner’s strategy.
Given the failure rate, it helps to focus on success. What is success for business owners? Most owners would be very happy to sell the business for maximum value in three years.
The Prior Diligence strategy and Dynamic Planning process provide owners with a methodology of accomplishing a sale of the business for maximum value in three years. Implementing a Prior Diligence strategy and accomplishing Dynamic Planning involves installing a working decision-making process in the business, documenting the owners’ strategy, establishing goals, and articulating the actions to be taken to reach those goals. All of this is described in detail in the Owning a Business substack at rickriebesell.substack.com.
The best way to avoid business failure is to adopt the Prior Diligence strategy and implement Dynamic Planning with the goal of selling the business for maximum value in three years.

Where there is a small or medium sized business with more than one owner, there is an owner agreement. It may not be obvious – in most cases it is not written. But for any multi-owner business the owner agreement must be there for the business to function. To start a business there must be agreement about the business entity to use, the initial capital, the basic governance, and the operational functioning of the business. In various documents regarding these matters there will be writing documenting the decisions made by the owners, but most owners do not document the basic strategy that has led them to business ownership. Most of the time, business owners understand very little about what motivates the other owners of the business, and conversations among owners will not be about strategy but about urgent operational decisions. Owners often make assumptions about the motivations of other owners, and conflicts arise when these assumptions prove false. When the owners must make decisions about important issues involving funding, changing consumer behavior, training and development of management, succession (including buy-sell provisions), technological investment, and regulatory compliance (especially regarding tax issues), the motivations of the owners will have a significant influence on the decisions the owners will make. Think about the businesses you know where conflict among the owners has stymied the success of the business or caused it to go out of existence. It is important for the success of your business to discover and document an owner agreement that anticipates the foreseeable decisions the owners will have to make for business success.
Most businesses do not have a documented owner agreement among the owners because it requires consistent effort to negotiate such an agreement. Often the subject matter is difficult to discuss, and the pressures of operating an owner-managed business make it difficult to find the time needed to accomplish this task. However, the success of businesses where the owners have documented an owner agreement indicates the benefit of taking on the task. There is a detailed description of how to adopt the Prior Diligence strategy and use Dynamic Planning in the Owning a Business substack at https://rickriebesell.substack.com. As with most complex and difficult tasks, it is best to use a segmented approach and address the various issues one at a time.
The issues that owners must discuss and agree upon can be generally described. The motivations of each owner should be addressed in a written strategy for the business. The entity type of the business should be understood in terms of liability and tax consequences for each owner. Any grouping of owners (such as family or seniority) and the concerns of any such group should be described, and appropriate restrictions should be put in place. The governance of the business, including who will make policy and who will be the chief executive, should be set forth. The events (triggers) that will cause one or more owners to transfer interests in the business should be defined. The procedure of the transaction occurring after each type of trigger, including funding and payment, should be provided for in detail. For each transaction, the price of the interest transferred should be defined. If the business will act as a buyer in certain procedures, then the means of the business accumulating the funds for the transaction should be described. The final task is the consolidation of the decisions into one coherent written document.
There should be a meeting of the owners and appropriate stakeholders to discuss each one of these general issues. For each issue there should be a separate meeting. The meetings should be held at regular intervals. The results of the meetings must be documented in writing. Where issues are technical or outside resources would be helpful, they should be utilized. There is a detailed description of how to implement an owner agreement in the Owning a Business substack at https://rickriebesell.substack.com. The documented decisions resulting from these discussions among the owners as consolidated into one coherent document will constitute an owner agreement and the primary planning for the business.