Listen to this post

Channeling Ted Lasso, one can hear him coaching his team that, to win, you need to prepare before you perspire. The same holds true when a business owner first begins to think about selling the business in a few years. The difference for the majority business owner between experiencing a good outcome and a great one is determined, to a large extent, well before the sale ever takes place. To help business owners achieve favorable outcomes, this post focuses on the owner’s pre-sale plan, which includes (i) motivating key employees, (ii) retaining experienced third-party advisors to guide the process, (iii) structuring the transaction to secure tax benefits, and (iv) preparing the owner to thrive in life after the sale.

Incentivize key employees to facilitate the sale

Successful companies typically have effective leadership teams, which play a critical role in preparing the company for sale. The team engages in a myriad of pre-sale activities necessary to bring the company to market, such as updating financial records, organizing existing inventory, improving or modernizing internal reporting systems, helping to motivate employees, and updating company records and processes relating to payroll, banking, product performance and client retention. The management team also will help to compile and produce a vast amount of information that the potential buyer will require as part of the due diligence process.  

The owner could adopt the view that the management team simply needs to do its job to assist with the sale of the business. But the owner who decides to offer financial incentives to company leaders in connection with the sale is likely to find this approach pays significant dividends in avoiding hiccups with the sale and also accomplishing the sale in a more efficient, prompt manner. In addition, providing this incentive makes it likely that employees will remain through the sale closing.

There are a variety of ways the business owner can incentivize the company’s management team, but what is most typical is for the owner to share a percentage of the net sale proceeds with key employees. The specific percentage each employee receives will be determined by a combination of the employee’s seniority on the organizational chart and tenure with the company. This incentive also requires the employee to be present at the time of sale, i.e., if the employee is discharged for any reason before the sale closes, the contract right to receive an incentive payment is extinguished.

Retain the right team of third-party advisors

The second pre-sale action item for business owners is to assemble a team of experienced professionals to guide and implement the sales process. The team will include at least the following: (i) a business broker or, for larger transactions, an investment banker (IB), (ii) a tax accountant (or a tax lawyer), and (iii) a lawyer with a mergers and acquisitions focus. As discussed below, each of these key advisors will play a critical role in achieving a successful outcome for the owner.

  • The business broker is vital because they will design a process that is geared to find buyers who will pay the best price to acquire the company. It is common for business owners to know all the top competitors in the market, some of whom are likely to be interested in purchasing the company. But the business broker will find a variety of other potential buyers, such as strategic buyers in other markets or regions, including private equity firms, family offices, and other syndicated buyer groups. The business owner who declines to retain a business broker is therefore potentially leaving millions of dollars on the table. 
  • The second key advisor is the tax accountant (or tax lawyer) who will help the owner to structure the transaction in a way that provides the owner with a variety of significant tax benefits.
  • The final advisory team member the business owner needs to retain is the M&A lawyer, who will help negotiate and draft documents necessary to memorialize the sale of the business. No business owner wants to be dragged into a legal dispute or, worse, a lawsuit that arises months or years after the sale of the company closes. While it is not a guarantee, relying on experienced M&A counsel makes it much less likely that the owner will become embroiled in post-sale litigation with the buyer. 

Structure the sale to achieve optimal tax benefits

A detailed discussion of tax planning to achieve the best results in connection with the sale of a business is beyond the scope of this post, but a tax advisor will help the business owner to consider (i) whether to structure the transaction as an asset sale or a stock sale, (ii) how to use trusts as part of the owner’s estate plan to defer or reduce taxes, (iii) whether to reallocate the tax basis of certain assets to secure more favorable tax treatment, and (iv) making charitable allocations to reduce the tax burden of the owner upon sale. Note that for estate planning that involves larger sale transactions, the owner will likely want to retain an estate planning attorney in addition to the tax accountant. Discussions will likely involve an estate planning professional who can create the type of estate plan that will provide both asset protection of the funds received from the sale and deferred tax consequences on these proceeds for the owner. 

Prepare to thrive after the sale

This last point is often overlooked, but it is important for the transaction to be considered a success. A number of post-sale surveys indicate that a high percentage of majority owners look back with misgivings following the sale of their business.  Indeed, the Exit Planning Institute reported last year that 76% of business owners who sold their business experienced profound regret within a year after the sale.

Owners experienced what the article terms as an identity loss after the sale of their business, and they were frequently disappointed with changes the seller made to the business, including personnel decisions, adding or subtracting lines of business, moving the office location, and making other changes that impacted the company’s culture.  These misgivings can be avoided or at least lessened if the owner prepares a post-sale life plan before the sale of the business closes. As the article states, the owner needs to develop this post-sale identity before the sale closes.

The structure of the owner’s new identity needs to be created before the sale concludes, and for it to be successful, it needs to include the type of goals that enrich and energize the owner’s life. For this to happen, the owner needs to spend the time necessary to determine how to redirect the drive that the owner previously devoted to the business. Owners tend to be goal oriented, and the activity is not as important as developing a new set of goals that kick in right after the sale is completed. The key is for owners to find a new passion (or a new set of passions) that renews their  excitement at getting out of bed in the morning after the sale goes through.

Conclusion

For the sale of a business to be successful, the owner needs to start planning long before the sale happens. Once business owners start thinking about selling their business within two to three years, the planning process should start to help lead to a successful outcome. The savvy business owner will ensure that the pre-sale action plan includes, but is not limited to, (1) motivating key employees by providing financial incentives; (2) retaining experienced third-party professional advisors to locate a strategic buyer for the business and then guide and document the sale; (3) evaluating various strategies to secure tax benefits; and (4) developing a detailed plan for the owner to thrive personally after the sale.

In Coach Lasso speak, it is best not to count one’s chickens before the eggs are hatched. And in the context of the sale of a business, the company owner needs to get the nest primed and ready before the eggs ever arrive.

Listen to this post

Texas isn’t just bigger — it’s also better, having become a more favorable place for private company owners to do business. Just last year, the Texas Legislature amended the Business Organizations Code to create a much safer environment for those who control companies: directors, managers, and officers. These changes have not gone unnoticed. Large companies like Tesla, Coinbase, and Dell have moved their headquarters from Delaware to Texas, part of a broader trend that is now termed the “DExit,” in which companies have left Delaware for states like Texas and Nevada. The companies making the move have expressed a fairly consistent set of reasons, including limiting shareholder litigation against company officials, reducing operating costs, and securing a more predictable legal environment for the operation of their businesses.

The statutory changes the Texas Legislature made last year, however, are not limited solely to companies considering a move to Texas. This post reviews three important changes that owners of companies that are based in or doing substantial business in Texas may want to make in Q4 to take advantage of the more favorable statutory environment now in place in the state.

1. SB 29 — Review of Legislative Changes Impacting Control Persons

The changes SB 29 made to the Texas Business Organizations Code (TBOC) in May 2025 fundamentally altered the legal landscape for directors, managers, general partners, and company officers. In summary, the changes altered the scope of fiduciary duties owed by those in control of Texas companies, shifted the burden of proving breach of fiduciary duty onto those who are bringing the claim, and imposed a higher burden on both pleading and proving these claims. Some of the critical changes are detailed below.

  • Codified the Business Judgment Rule and created a statutory presumption that directors, managers, and general partners acted in good faith, on an informed basis, and in the honest belief that their actions served the company’s best interests — creating a new statutory shield
  • Shifted the burden of proof to claimants (equity holders) who must now plead their breach of fiduciary claims against with particularity
  • The claimant also must establish that the fiduciary committed fraud, intentional misconduct, ultra vires acts, or a knowing violation of law rather than relying on generalized unfairness allegations
  • Applies to corporations (§21.419), LLCs (§101.256), and limited partnerships (§153.163)

2. Consider Opting In to the New TBOC Changes in Q4

In light of the statutory changes made to the TBOC last year, majority owners will want to consider opting in to the protections now available. These statutory changes protections are not automatic, however, for companies already incorporated as of May 2025 — they must amend their governing documents for the revised statutes to apply. Depending on the company’s governance documents, this may require unanimous consent by all shareholders or members; if unanimity is not mandatory, a majority of the company’s equity ownership will be able to adopt the amendments. The opt in requires corporations to amend their bylaws and LLCs to amend their company agreements.

From the perspective of the majority owner, personal and business dealings often overlap in closely held companies. The owner may hold interests in other companies or family ventures, and any transaction in which the owner directs the company to engage in business with the owner’s other ventures can potentially give rise to claims for breach of fiduciary duty — even when the transaction actually benefits the company. These are treated as self-interested business dealings because the majority owner holds interests on both sides of the transaction.

SB 29 addresses this problem by building onto the TBOC’s existing safe harbor provision for interested-party transactions (§21.418), which deems these transactions to be valid if they are approved by disinterested company directors, approved by shareholders, or they are ultimately determined to be fair to the company in litigation. SB 29 thus adds another layer of protection: Companies may now form special committees of independent, disinterested directors to review and approve related-party transactions in advance. Once approved in this way, the transaction is evaluated under the more deferential, codified business judgment rule rather than the tougher “entire fairness” standard. For especially significant transactions, companies can also request a pre-transaction ruling from a court confirming a director’s independence or the propriety of the transaction before it is ever challenged. These changes give majority owners the clarity and the freedom to run their business without a constant concern that ordinary business dealings will be attacked as disloyal — and therefore actionable.

While a change to the governing documents could be made by the majority owner alone in Q4 if only a majority of ownership is required for amendment, the owner will want to consider holding a meeting of shareholders or members to explain the reasoning behind adopting the new statutory scheme. Some equity holders may express concern that the majority owner will now be less constrained legally, but the owner’s pitch should be that this step reflects a desire to keep the focus on growing the business — without distraction caused by petty disputes over its direction.

3. Consider Redomesticating in Texas

For company owners running businesses based in Texas, but incorporated in Delaware or in other states, now may be the time to consider reincorporating the business in Texas. Owners will need to conduct a thorough cost-benefit analysis to decide whether the TBOC protections now in place after SB 29 provided financial and other benefits sufficient to justify the time and cost involved in reincorporating. The conversion process is more complex and more expensive than simply opting into the new statutory amendments as a Texas company; it will require analysis of legal, tax, and licensing issues, and the owner may need to answer questions about the change from shareholders, customers or clients, lenders and third-party vendors.

One important factor to consider in making this decision is the company’s experience with shareholder litigation. If the company has never faced a lawsuit from its shareholders or members against its directors, officers, or managers, and no claims are currently pending, that may suggest that reincorporation isn’t necessary given the time and expense involved. On the other hand, if the company has dealt with shareholder litigation in the past — and endured the distraction and legal expense that comes with it — the majority owner may conclude that reincorporating the business in Texas is a strategically wise decision that protects the entire management team and is in the company’s best interests.  

Conclusion

As majority owners head into Q4, one important checkup item for them to consider is whether to opt in to the new protections that SB 29 added to the TBOC last year. Unless opting in requires unanimous consent from all of the company’s owners, or the adoption of the statutory changes would create friction with some of the other owners, the new changes clearly benefit majority owners. Stated simply, Texas majority owners now have the opportunity to take steps to protect themselves and their management teams from most shareholder and member lawsuits as a result of the TBOC changes. But formally opting in to accept the statutory protections of these amendments is the only way to secure the benefits that are now available.

Listen to this post

The opportunity to make a substantial investment in a private company can be exciting — it offers the potential to share in the rapid growth of the company and may permit the investor to participate on the company’s governance team. But private company investing is not for the faint of heart as it also comes with significant risks.

These risks are not limited to the uncertainty of the company’s future business prospects, because once the investor delivers the funds, the majority owner’s full control of the company poses additional risks. Further, unless the minority investor is able to secure a contract exit, the majority owner will also control the investor’s ability to monetize his or her interest in the company. Unlike public company shareholders, investors cannot sell their shares or their units whenever they wish, because no market exists for them. In short, getting out of the business for investors is much harder than getting in, which is why they are wise to secure a path to an exit (the right to sell their interest) when making their investment. This post reviews some of the significant risks that minority investors face in making their investment, it considers protective measures investors can negotiate for to protect themselves, and it outlines legal claims that may be available if the majority owner engages in improper self-dealing.

The Post-Investment Risk Scenario

The majority owner will serve, invariably, in a management role as the company’s senior officer, as well as heading up its board or serving as the lead manager. In practice, this means that the owner is responsible for all major decisions in running the business. This unchecked power means that the majority owner can engage in self-dealing conduct in a variety of ways, including by entering into various interested (related party) transactions that favor the owner, by diverting business away from the company for the owner’s benefit, or by paying excessive salary and/or bonuses to the owner or the owner’s family members. In addition, the majority owner can elect to issue new shares in the company to third parties that require the minority investor to furnish additional capital to the business or become subject to dilution — which reduces the investor’s ownership percentage. 

The investor likely lacks the power to block any actions taken by the majority owner, but if the investor openly expresses opposition, that can result in a vindictive response by the owner. Specifically, the majority owner can engage in squeeze-out or freeze-out tactics that may include removing the investor from any management role, terminating any compensated position that the investor holds in the business, cutting off all distributions, and effectively making the investor’s stake in the business worthless on a current basis unless or until the investor succumbs and sells out for a price well below the fair market value of the investor’s interest.

 Protective Measures That Reduce Investment Risk

The potential risks the investor may be exposed to after making the investment,  discussed in the previous section, can be mitigated to a large extent if the investor secures these protections in the governing documents before the investment is made. These contract protections are discussed below:

  • The investor can insist on securing veto rights in the operating or shareholders agreement over key decisions made by the company’s management. These also are known as super-majority rights and cannot be taken unless they are approved by 85% of all shareholders, which applies if the investor holds 15% or more of the shares.
  • Veto rights requiring approval may include making compensation changes above a certain percentage, adding new members or shareholders, taking on debt above a certain limit, selling the company or substantially all of its assets, removing the minority investor from a management role, and making any amendments to the governance documents. 
  • The final protective measure is for the minority investor to secure a buy-sell agreement as the exit mechanism that is available as a last resort. If the parties reach a point of impasse in their business relationship, the buy-sell provision gives the investor the contract right to require the company to purchase the investor’s interest for a value determined by an independent third party. We have written extensively about buy-sell agreements in previous posts.

Legal Claims Available for Improper Conduct by the Majority Owner

When a majority owner engages in conduct that is harmful to the business, that does not usually give rise to a direct action against the owner by the minority investor. This is due to the fact that the investor was not harmed directly and the injury was a decline in the value of the investor’s ownership interest in the business. For this reason, most investor claims must be made in a derivative capacity — the investor is required to bring the claims and seek relief in the name of the company. These derivative claims are governed by statute, and they are difficult to pursue successfully for shareholders and LLC members because they have to run the gauntlet created by the Texas Business Organizations Code (TBOC) (see TBOC Section 21.551 to 21.563 (corporate shareholders) and Sections 101.451 through 101.463 (LLC members)).

These statutory provisions create a number of procedural hurdles that shareholders and LLC members must surmount in bringing the derivative claim. These include the requirements that the investor must own the interest continuously from the time that the claim arose through completion of the litigation, demonstrating that the investor will fairly and adequately represent the company and, the most difficult of all, presenting the company with a written demand that specifies the act, error or omission that is the subject of the claim and requests the company to take suitable action(see TBOC Section 21.553(a)). Unless the company has suffered or will suffer irreparable injury, the shareholder cannot file a lawsuit against the fiduciary until the earlier of 90 days or a notice from the company that it has rejected taking the specific action that was called for by the shareholder’s demand letter.

If the directors or managers reject the shareholder’s or member’s demand, the trial court will consider in any lawsuit only whether the decision was made in good faith by directors (or managers) who are independent and disinterested, after conducting a reasonable inquiry. If the court determines that the decision was made in good faith, the derivative suit will be dismissed, and the shareholder will have no further recourse.

The three procedural hoops discussed above make it difficult for a shareholder or an LLC member to successfully prosecute a derivative lawsuit. Importantly, these requirements, do not apply to “closely held” companies (seeSection 21.563). A closely held company has fewer than 35 shareholders and is not listed on a public exchange. If the company is closely held, then the minority shareholder or member is not subject to the procedural requirements of establishing continuous ownership, proving fair and adequate representation, or issuing a written demand to the company before filing suit. Further, a shareholder or member in a closely held company who files a derivative lawsuit is permitted to recover legal fees if he or she can show that the proceeding resulted in a substantial benefit to the corporation.

In considering potential derivative litigation claims, minority investors need to be aware of the Texas Legislature’s passage of Senate Bill 29 last year, which amended the TBOC in ways that make it even more challenging for them to pursue claims for breach of fiduciary duties against company control persons, e.g., directors, managers and officers. Specifically, SB 29 eliminated the common law burden-shifting framework that previously applied to these claims, which had placed the burden on fiduciaries to demonstrate that they acted with fairness when engaging in self-interested transactions. The Legislature created a new affirmative pleading requirement: The plaintiff shareholder or member must now plead with specificity that the fiduciary’s conduct constituted fraud, intentional misconduct, an ultra vires act, or a knowing violation of law. If the company existed before Senate Bill 29 was passed, it must opt in to these requirements.

Outside of the derivative claim context, investors can pursue a breach of contract claim if they can establish that the majority owner or another control person at the company breached any of the terms contained in the company’s governance documents or in a shareholder agreement. Finally, investors can bring fraud claims if they can prove that they were fraudulently induced to make their investment by false statements made to them by the majority owner or others. 

Conclusion

Investing in private companies has a strong potential upside, creating the opportunity for outsized returns from a fast-growing business. But this is a classic risk-reward scenario, because a private company investment often involves a degree of risk that far exceeds the investment in a public company. This is attributable to the majority owner’s largely unchecked control over the business, which brings to mind Lord Acton’s famous historical warning: “Power tends to corrupt, and absolute power corrupts absolutely.”

That assessment is unfair and inaccurate if applied to most private company majority owners, but majority control remains a risk factor. In exercising control, some majority owners will engage in self-dealing conduct causing economic harm to the company, will substantially dilute the investor’s stake in the business and will engage in squeeze-out tactics that place the investor in a difficult financial position without effective recourse.

In sum, an ounce of prevention is worth a pound of cure, and investors need to protect themselves before things go off the rails in their dealings with the company’s majority owner. This protection is secured by obtaining veto rights in the company’s governing documents or shareholder agreement and by securing a buy-sell agreement that will provide the investor with the right to sell the investor’s interest in the business. Absent these protections and without a buy-sell agreement in place, if the majority owner engages in an abuse of power, the investor will be left to seek legal relief against the owner by asserting derivative or other claims that are both procedurally challenging and expensive to pursue.