iscoverI've been mediating shareholder disputes for years, but the case that landed on my desk last month revealed a dangerous blind spot in how accountants approach shareholder agreements.
The $2m shareholder agreement that nearly killed a company
21 August 2025
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11 minute read
A profitable professional services company. Three decades of consistent dividends. A comprehensive shareholder agreement that looked bulletproof on paper. Yet when two major shareholders decided to exit, the company was 24 hours away from insolvency.
The twist? Their accountant had reviewed this shareholder agreement multiple times over the years and never spotted the fatal flaw.
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The "comprehensive" agreement was about to destroy the company it was designed to protect.
In the past three months alone, I've mediated three separate shareholder disputes. Each time, lawyers and accountants have called me in after the damage was already done. Each time, I hear the same refrain: "We thought the shareholder agreement covered everything."
What troubles me most: these disputes could have been prevented if someone had asked the right questions before the crisis hit.
The perfect storm
The company in question was a textbook example of what looks good in theory but fails catastrophically in practice.
The shareholder agreement specified a neat valuation formula: net maintainable earnings times a multiple of 2. Simple. Clean. Updated annually. No surprises.
What the agreement didn't account for was this scenario: what happens when your two biggest revenue generators, representing 40 per cent of the shareholder base, decide to exit simultaneously?
Suddenly, the company faced:
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A $2 million share buyback obligation
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The immediate loss of a major revenue stream
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Zero retained earnings (everything had been paid as dividends)
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The need to borrow funds just as their risk profile skyrocketed
The shareholder agreement that was supposed to provide certainty was about to trigger insolvency.
The prevention gap
I recently asked an accountant about their approach to shareholder agreements:
"We review them when clients ask us to, usually when someone's thinking about exiting or bringing in a new partner."
"What do you look for?"
"Mainly the valuation methodology, make sure the tax implications are clear."
This is what I call the compliance mindset: treating shareholder agreements like tax returns instead of business survival tools.
Here's what that conversation should have sounded like:
"We stress-test these agreements annually. What happens if your biggest revenue generator exits? Can the company fund the buyback without borrowing? What if two shareholders exit in the same year? Have you set aside funds for this scenario?"
The difference? The first approach waits for problems. The second prevents them.
The hidden landmines
Most shareholder agreements contain provisions that look sensible until reality hits. Here are the ones I see causing the most damage:
The fixed multiple trap: Using static valuation multiples that don't adjust for changing risk profiles. When key shareholders exit, risk increases, but the buyback price stays artificially high.
The cash flow killer: Mandatory buyback provisions with no consideration of the company's ability to fund them without jeopardising operations.
The revenue dependency blind spot: No adjustment for shareholders whose departure directly impacts the company's earning capacity.
The dividend distribution disaster: Paying out all profits as dividends without retaining funds for future buybacks or business disruptions.
I've seen companies with $5 million annual profits forced into insolvency because they couldn't fund a $500,000 share buyback. All because nobody asked: "What if we need this money when we don't have it?"
What strategic review looks like
Stop treating shareholder agreements like legal documents that sit in a filing cabinet. Start treating them like financial planning tools that need regular stress testing.
Here are the conversations you should be having with clients:
Cash retention planning: "You're paying out 100% of profits as dividends. What happens if you need to buy back shares next year? Should we be retaining some earnings as a buyback fund?"
Scenario stress testing: "Your agreement requires 12 months' notice for exits. What if your two biggest fee earners both give notice in the same month? Can the business survive the buyback and revenue loss?"
Valuation reality check: "The agreement uses a fixed multiple of 3, but what if the departing shareholder is responsible for 30% of revenue? Should the multiple adjust for increased risk?"
Funding strategy review: "The company has to buy back shares if nobody else wants them. Have we modelled different exit scenarios to make sure this won't trigger financial distress?"
These aren't legal questions – they're business survival questions that accountants are perfectly positioned to address.
The early warning system
Smart accountants don't wait for shareholders to announce their exit plans. They build early warning systems into their regular client reviews.
Annual agreement audits: Review the shareholder agreement annually, not just when someone wants to exit. Business circumstances change, and agreements should reflect current reality.
Cash flow modelling: Model different exit scenarios during annual planning. What if one shareholder exits? Two? Your biggest revenue generator?
Retained earnings strategy: Discuss dividend policies in the context of future buyback obligations. Sometimes retaining earnings is smarter than maximising current distributions.
Risk profile assessment: As the business evolves, does the valuation methodology still make sense? Should multiples adjust based on key person dependencies?
The company I mediated? We found a solution, but it required creative restructuring and significant compromises from all parties. The alternative was liquidation.
The real tragedy is that this entire crisis could have been prevented with proper scenario planning two years earlier.
The relationship preservation factor
Something most accountants miss: well-designed shareholder agreements preserve business relationships. Poorly designed ones destroy them.
In my mediation work, I see the same pattern: shareholders who start as friends and partners end up in bitter disputes because nobody planned for the difficult scenarios.
The $2 million buyback case? The relationships are permanently damaged. Former friends now communicate only through lawyers. The business survived, but the trust didn't.
This wasn't a legal failure – it was a planning failure.
Beyond the document
The best shareholders agreements aren't just legal contracts – they're conversation starters for ongoing business planning.
Instead of asking "Do you have a shareholder agreement?" start asking:
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"When did you last stress-test your shareholder agreement against different exit scenarios?"
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"How are you funding potential buyback obligations?"
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"What happens to the business if your key revenue generators decide to exit?"
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"Are your retained earnings sufficient to handle shareholder exits without borrowing?"
These questions position you as a strategic business adviser, not just a compliance provider.
The challenge
Look at your corporate clients with multiple shareholders. When did you last review their shareholder agreements as business planning tools rather than legal documents?
How many have retained sufficient earnings to fund buyback obligations? How many have stress-tested their agreements against realistic exit scenarios?
If you can't answer these questions, you're not providing strategic advisory services; you're just hoping nothing goes wrong.
The disputes I mediate represent preventable business crises. Companies with proper planning rarely end up in mediation rooms.
The choice is yours: be the accountant who prevents shareholder disputes through proactive planning, or be the one who gets called in to help pick up the pieces after relationships are destroyed and businesses are threatened.
Because here's the reality: shareholder agreements that aren't regularly reviewed and stress-tested aren't protection – they're time bombs waiting for the right trigger.
Don't let your clients become the next case study in how a "comprehensive" agreement nearly destroyed a profitable business.
Eddie Senatore is a Fellow of CA ANZ with over 30 years of experience in business recovery and insolvency.
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