A lot of times when clients approach us and they’re structuring their business, they’re very concerned about 50-50, who owns 51% of the business, who owns 50% of the business, and who falls below 49% of the business? In very simple terms, these are somewhat important because generally if you don’t do any planning, the person who owns 51% of the business will often have control of the business. Somebody who owns less than 50% of the business will not have control and that makes a big difference.
So often business owners don’t want to give up that 50% interest. What does that do for a minority investor? How could you possibly ever put money into a business and still have some degree of control over your destiny to make sure that the business doesn’t do things you don’t want it to do? From the reverse side, you as a business owner, how can you attract investors to come in if they won’t have any control and are just giving their money to you in blind faith that you’re going to help them? That’s where operational control comes in.
What we see in deals, particularly with investors of some level of sophistication, is that those investors will negotiate for some degree of control over the operations of the business. Certainly, when I’m representing a minority investor that’s investing in somebody else’s business, one of my goals is to make sure that that investor has a small interest in that business, but has some control over what happens to it. Usually what this relates to is restrictions in either the corporate documents or the LLC documents that provide what the business can and cannot do without talking to the investor.
A typical provision would say, “Without getting the consent of a minority investor or without getting the consent of at least 85% of the owners.” You’re building a provision here that creates a tipping point that requires a minority investor to be given a chance to have input. Then, without input, a company cannot do some type of major action, such as a merger, a major purchase, an acquisition of another company or some change of management or control. The investors want to have some degree of understanding what the business is and making sure the business doesn’t morph into that, morph for them.
What we want to do as negotiating parties involved in this transaction is to make sure that we understand these degrees of control, these operations, and what they do for us. The majority of investors are going to have different desires. Typically, the majority investor is going to want to do as many things as they can with full freedom and the minority investor is not going to want to allow that. They’re going to want to have full control over the business. The balance is usually somewhere in the middle. When we bring everybody together, there has to be a compromise. Everybody has to come out to the same point, but from an overall standpoint, this does give us a lot of freedom and the ability to bring everybody together in a way that makes economic sense. It’s really, really great from that standpoint.
Each situation is different so you’re going to want to talk to your lawyer and make sure that you work through this with them, and you are applying experience and knowledge from other transactions.
What has been your experience with this? Have you negotiated for control? Have you had investors that wanted to take a lot of direction over your business? Join us in the comments below and let us know about your experiences.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Helmut Gevert.
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Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
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Make sure you download our free reports on how to build your company the right way.About the AuthorR. Shawn McBride — is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride Law Firm or call (214) 418-0258.