THE SUNDAY TIMES - BUSINESS DOCTOR
18 April 2010

DL writes: My son has been helping to manage my business in recent years. His attitude is far from satisfactory, however, so I would like to bring in an outsider. I have an old friend in mind and would like to offer him some equity. Do you have any advice as to how I should structure it?

Dear DL, there are many considerations when offering any individual an equity stake in your business writes Maebh Gavin, Corporate Finance Manager with Horwath Bastow Charleton in Limerick.

Firstly, you need to carefully asses the motivation for the offering and the on-going role you would like the individual to play. You mentioned that your son’s attitude is far from satisfactory but there is no guarantee that your friend will work out. What happens if your friend’s performance is less than satisfactory? What happens if you have a difference of opinion?

It is therefore essential that you clearly document what your friend’s role will be. A written agreement (a Shareholder’s Agreement) will not only help to clarify the position but also avoid legal problems and the potential for disputes in the future. Even with close friends and family it is essential to keep your business relationship formal. A Shareholders Agreement need not be a lengthy complicated document. It can be a brief summary of the roles and responsibilities of the shareholders and their relationship with the company.

Secondly, you need to consider what the individual will pay for their stake. Valuing a family business can be difficult and different people will have different opinions. In order to avoid disagreements it is advisable to obtain an independent valuation. A corporate financier will value the business based on historic performance and future potential. This may involve incurring some costs but it is money well spent.  

Offering an equity stake to the right person can greatly benefit your business - not only does the business receive a cash injection but should also get a talented and committed person.