Ownership Agreements: Why You Need One If There Are Multiple Owners

If multiple people own a company together — whether from the start, or because an investor or co-owner joined later, for instance via reinvestment in a buy & build model — an ownership agreement (also called a shareholders' agreement) is one of the most important documents you can have in place.

What is an ownership agreement?

An ownership agreement is an agreement between the company's owners about how you relate to each other and to the company — beyond what's already set out in company law and the company's articles of association. It works as your internal rulebook for situations where the owners' interests might conflict, and is therefore typically most valuable precisely when it's written before a conflict arises — not afterward.

Why does it matter so much?

Without an ownership agreement, you're largely left to the general rules of company law, which don't necessarily fit your specific situation or mutual arrangements. If you end up in a situation where one owner wants to sell, another wants to buy more, or you simply disagree on the business's direction, a well-drafted ownership agreement can save you a long, costly conflict — or, at worst, a forced dissolution of the partnership.

The key provisions in an ownership agreement

• Right of first refusal: If an owner wants to sell their stake, the other owners should generally have first right to take it over, before it can be sold to an outside party.
• Tag-along rights: If a larger owner sells their stake to an outside buyer, the other owners get the right to sell their stakes alongside on the same terms — so they don't end up as minority owners under a new, unknown majority owner.
• Drag-along rights: Conversely, a majority owner can, under certain conditions, force minority owners to sell their stakes along, if an outside buyer wants to take over the whole company — this makes the company easier to sell as a whole, since a buyer doesn't need to negotiate with each minority owner individually.
• Decision-making processes: Which decisions require unanimous agreement among all owners, and which can be made by a simple majority?
• Valuation on exit: How is the price set if an owner needs to be bought out — by an agreed formula, an independent valuation, or a negotiated price?
• Non-compete and non-solicitation clauses between the owners themselves: What may a departing owner do afterward in relation to the company's customers and line of business?

Why is this especially relevant if you reinvest after a sale?

If you choose to reinvest part of your sale proceeds and continue as a minority owner alongside a private equity fund or other investor, an ownership agreement isn't just relevant — it's typically a requirement from the investor's side. Here, it's particularly important to clarify the exit terms for your own stake, and how the return is split at a future combined exit.

When should you get an ownership agreement drafted, before listing the business for sale?

As early as possible — ideally when you first become multiple owners, while the relationship between you is good and no specific conflict is on the horizon. The longer you wait, the greater the risk the agreement only gets drafted once a disagreement has already arisen — at which point it's far harder to agree on reasonable terms.

Frequently asked questions

Is an ownership agreement a legal requirement?

No, but it's strongly recommended as soon as there are multiple owners of the same company. Without one, you're left to the general rules of company law, which don't necessarily account for your specific situation.

What's the difference between tag-along and drag-along rights?

Tag-along gives a minority owner the right to sell their stake along if the majority sells. Drag-along gives the majority owner the right to require the minority owners to sell along, if an outside buyer wants to take over the whole company.

Can we draft an ownership agreement after we've already started disagreeing?

It's possible, but it's far harder to agree on reasonable terms once a conflict is already underway. It's best to have the agreement in place long before any specific disagreement arises.

Considering setting up or updating an ownership agreement? Book a no-obligation call if you'd like help getting it drafted correctly.