Empowering Business Exits: The Vital Role of Shareholder Agreements

Empowering Business Exits: The Vital Role of Shareholder Agreements

When it comes to business exits, many committed business owners face the challenge of finding the right successor to ensure the long-term success of their company. Shareholder agreements play a crucial role in this process by providing clarity and guidelines for the transfer of ownership. In this article, we will discuss the importance of shareholder agreements and how they can support business owners in their exit strategies.

Why are shareholder agreements important?

Shareholder agreements are vital for owners and shareholders who are looking to exit their businesses. These agreements help establish a clear framework for the valuation, sale, and transfer of shares, thereby minimising potential disputes during the ownership transition. By having a well-defined shareholder agreement, business owners can ensure a smooth and disruption-free exit when the time is right. You can discover more about the benefits of shareholder agreements here. 

Supporting a Client's Exit Strategy

After successfully running their business for many years, our client decided to step back and sell the company. However, they also recognised the importance of empowering their management team during the interim, to ensure the long-term success of the business.

To incentivise the managers and align their interests with the company's growth, we implemented an Enterprise Management Incentive scheme (EMI). This scheme allowed us to grant share options to the managers at a discounted price, giving them a stake in the business's future success. By doing so, we ensured that the managers would actively contribute to driving the company's growth and share in the financial rewards upon its sale.

Establishing an EMI Scheme

Setting up an EMI scheme required careful consideration of the shareholders' agreement and obtaining investor consent. In our case, all necessary provisions around the shareholder agreement were met, enabling us to successfully establish the EMI scheme. During this transition, the owner manager retained their controlling share in the company, while the managers received the opportunity to enhance their skills and decision-making abilities.

Long-Term Benefits for the Management Team

In the long run, the management team stands to gain significant financial benefits from the sale of the business. Through their upskilling and active involvement in the company's growth, some managers may even have the option to become full shareholders in the future. Alternatively, the team could collectively pursue a buyout of the owner-manager.

Adaptation of Shareholder Agreements with EMI Schemes

While a shareholders' agreement is not mandatory for setting up an EMI scheme, it is highly recommended, especially in cases where multiple shareholders exist. By having a comprehensive shareholders' agreement in place, businesses can mitigate the risk of disruption during the exit process, particularly when different levels of investors are involved. Such agreements provide a clear understanding of the rights, obligations, and expectations of all shareholders, ensuring a harmonious and secure transition of ownership when the time comes. 

Shareholder agreements play a crucial role in facilitating business exits, providing the essential clarity and structure for the transfer of ownership, minimising disputes and ensuring a seamless transition. By considering options like the Enterprise Management Incentive scheme, business owners can incentivise and empower their management teams, creating a win-win situation for all parties involved. Discover more about how we supported a client in their transition of ownership in the case study below.