O*No Legal Founding Director Kristen Porter breaks down the key considerations you need to address when deciding whether to bring new stakeholders into your business.
I’m working with a client at the moment who has only been running their agency and brand for about a year, but they want to put a solid succession plan in place now.
You might think it’s a bit early to worry about such things, but it’s a smart move.
Unfortunately, my client learnt some pretty tough lessons at the last agency they were a partner in, and they don’t want to make the same mistakes twice.
So even though they’re not looking to step back for the next five to 10 years, I’ve helped them set up a retention and succession plan that will see them bring in three new shareholders as business partners.
All of the shareholders will have the same rights as my client – income, capital and voting – but at various percentages and, for now, my client retains control over most of the day-to-day decisions.
It’s essential when you’re considering offering ownership in your real estate agency that you get specialised legal advice.
After all, your agency is your baby, and you’ve put a lot of blood, sweat and tears into making it a success.
You don’t want to do anything to jeopardise that.
I have helped many clients with retention and succession plans, as well as with shareholders’ agreements and the number one thing principals get wrong is thinking there’s only one way to develop a succession or retention plan and grant ownership.
The good news is there are many different ways you can structure things and numerous other carrots you can offer, and some of them don’t mean granting ownership in your agency at all.
Know your ‘why’
But I’ll get to those carrots in just a minute.
The first thing principals forget to do when they’re considering granting ownership and that I want you to think about now, is why you’re looking at giving someone part ownership in your business.
There are two main reasons principals come to me wanting to offer ownership in their agency:
- Retaining talent
- Securing talent
If you’ve got a top performer bringing in a host of clients, sales and capital to your business, it makes sense that you want to hold onto them.
Many see granting ownership as a ‘golden handcuff’.
On the opposite side of the equation, many principals seek my advice on offering ownership as a way of luring talent to their agency.
Many want to scale and grow their business and see offering shares in the agency as a way of getting the high performers to jump ship.
What’s the carrot?
As I said before, there are many options at your disposal to retain and lure talent, not just business ownership.
Some agents will be enticed by dividend-paying shares, while others might prefer a cash bonus linked to performance targets.
Another agent might prefer extra time off to work on their business or take a holiday, while yet another might find more value in flexible working hours so they can tuck their kids in bed each night.
So sit down, get to know your agents and find out what motivates them. You might not have to offer agency ownership at all.
How to bring in a new shareholder
If bringing in a new shareholder is your only option or the best option, you need to decide what type of shares you award.
So many principals I assist are surprised when I tell them they don’t have to hand over the entire agency with a red bow on top.
There are three main types of shares, with differing rights, you can offer:
- Shares with rights to capital (when you sell shares)
- Shares with income (that pay dividends)
- Shares with voting rights (power to make decisions)
What type of shares you offer will depend on why you’re bringing in a new shareholder:
- To retain a top performer
- To plan for the future
- To exit the agency, retire and sell the business
- To expand or grow
- To encourage or reward hard work
If you were looking to hang onto a superstar agent and they were motivated by money, you could give them income-only shares at a set percentage, which means you would keep 100 per cent ownership of your agency and full decision-making powers.
If you wanted someone to take over when you retire, then ordinary shares, with rights to capital, income and voting, might be best.
But even then, you don’t have to award shares in equal proportion to your own. Instead, you might bring that agent in at five per cent and put in place a plan for them to buy in more as they hit performance targets.
In the case of the client I’m working with right now, they remain the majority shareholder and run the business on a daily basis.
But we have put a shareholders’ agreement in place to outline how major decisions, such as rebranding, taking out big loans, buying or selling a rent roll or bringing in a new business partner, will be made.
For big-ticket things like these, a special resolution, where at least 75 per cent of the shareholders agree, will be needed.
Deciding to offer others ownership in your agency is a big call, and you want to ensure it’s the right move for everyone. So before you do anything else, I urge you to:
- Identify why you want to bring in a new business partner/s.
- Find out what motivates the talent you are trying to attract or retain and whether you can entice them with another form of reward.
- If you do end up offering ownership, consider how you do this, as you might not need to award capital or voting rights.
- Seek professional legal advice from a strategist with real estate-specific experience.
Over the coming weeks, I’ll also be sharing some critical information on the essential questions to ask when going into business with others, why you need a relationship road map and the four steps you need to consider when putting your shareholders’ agreement together.
Boring legal stuff: This article is general information and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact your lawyer or, if you do not have one, feel free to contact us.