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6 Reasons Why an Updated Shareholder Agreement is Important to Private Company Business Owners

Mark G. Metzler, CPA, CGMA, CEPA
Mark G. Metzler, CPA, CGMA, CEPA Director, Audit & Accounting

While the majority of privately-owned companies may have shareholder agreements, many of the agreements are locked away in a filing cabinet and have not been examined for years. However, an updated shareholder agreement is important to private business owners for several reasons.

Reason #1: Clear Communication and Expectations

A shareholder agreement, also commonly referred to as a buy-sell agreement, outlines the rights, responsibilities, and obligations of each shareholder. By updating the agreement, business owners can ensure that all shareholders have a clear understanding of their roles, decision-making authority, and expectations. It helps avoid misunderstandings and conflicts among shareholders (and potentially their heirs) by establishing a transparent framework for the operation of the business.

Reason #2: Changing Business Environment

Over time, a business may undergo significant changes, such as expansion into new markets, diversification of products or services, or entering into strategic partnerships. An updated shareholder agreement can reflect these changes and provide guidelines on how shareholders should adapt and contribute to the evolving business landscape.

Reason #3: Ownership and Voting Rights

As a private business grows, the ownership structure may change. New shareholders may join the company, while existing shareholders may acquire additional shares or sell their ownership stake. An updated shareholder agreement can address these changes and outline the rules regarding ownership transfers, rights of first refusal, voting thresholds, non-compete agreements, and other important considerations.

Reason #4: Exit Strategies

Private business owners should have a well-defined exit strategy in place. This includes provisions for selling shares, handling buyouts, or addressing the departure of a shareholder due to retirement, disability, or other reasons. It will address how the price is determined and how the transaction will be funded. An updated shareholder agreement can provide mechanisms for an orderly exit and protect the interests of the company, the departing shareholder, and the remaining shareholders.

Reason #5: Dispute Resolution

In the event of disputes among shareholders, an updated shareholder agreement can include provisions for dispute resolution mechanisms such as mediation or arbitration. These mechanisms can help resolve conflicts more efficiently and avoid costly and time-consuming legal battles.

Reason #6: Compliance with Laws and Regulations

Laws and regulations affecting businesses often change over time. An updated shareholder agreement can ensure that the business remains compliant with current legal requirements and reflects any new regulations or obligations that may impact the shareholders' rights and responsibilities.

Next Steps to Ensure Your Shareholder Agreement is Up-to-Date

It's important for private company business owners to regularly review and update their shareholder agreements to align them with the evolving needs of the business and to address any changes in the ownership structure or regulatory environment. In this article, I provide several key elements to include in your shareholder agreement. We recommend that you contact us to ensure that your updated agreement accurately reflects your business's objectives and protects the interests of all shareholders.

Contact the Author

Mark G. Metzler, CPA, CGMA, CEPA

Mark G. Metzler, CPA, CGMA, CEPA

Director, Audit & Accounting

Employee Benefit Plans Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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