Steps to Implementing an Owner Agreement
1. Be concerned that you not lose the time and effort involved in creating your business interest.
2. Understand that the most likely person to pay you or your heirs for your business interest will be someone already involved with the business. If for no other reason this fact means you should have at least one co-owner with whom you can make an agreement about the fair value you or your heirs should receive for your business interest.
3. Facilitate the frequent occurrence of owner meetings where the following issues are discussed and the discussions are documented.
4. Specify the triggers that will cause the payment provisions of the agreement to occur. Usually these triggers are permanent disability and death. These triggers cause an involuntary withdrawal from the business and a payment to the owner experiencing the trigger event.
5. Specify how the business should run in the event of a temporary disability of an owner-manager. These provisions should take into consideration the competency of the owner. To the extent the owner cannot participate in the decision-making process of the business, the owner's attorney-in-fact holding an appropriate power of attorney should participate in the decision-making process.
6. In the event of the loss of the contribution of an owner, specify the liquidity requirements of the business to replace the owner's skills and continue profitable operation of the business.
7. Identify the value of the business interest by stating a dollar amount and providing a process for revision of that amount on an annual basis.
8. Consider the overall value of the business with regard to minority interests, majority interests, liquidity requirements, and life insurance coverage available on the owners. Ideally, the business can insure the lives of the owners to cover the complete value of the business interests and liquidity requirements.
9. Accept that the agreement will likely not be executed as written and that a process of maintaining agreement must be in place. An arbitration requirement is one method to keep agreement pressures from creating a situation where the agreement becomes unenforceable.
10. Meet with heirs and spouses to review the rationale behind the value numbers in the agreement.
11. Based on the documented discussions, create a draft agreement, have all owners review the agreement, and execute the agreement.
12. Encourage each owner to make appropriate estate planning arrangements, especially as to powers of attorney.
13. Establish appropriate insurance coverage on each owner. The business should be the owner of all insurance policies.
14. Establish the procedure for the business to receive insurance policy proceeds and make proper payments pursuant to the agreement.
15. Continue having regular meetings with owners to discuss the issues involved in the owner agreement, document those discussions, and develop a strategic plan that will be the basis for revising the owner agreement.