This seems like an absolute no brainer to me but you may be surprised by how many people go into business with someone without first agreeing what each other’s role will be in the new business and what would they would do if the worst should happen.
At first, in the early stages of the business, this doesn’t present any real issues but as the business progresses and grows conflicts can arise even amongst the best of friends. The result is often the end of the business and it really doesn’t have to be.
We always recommend that anyone going into business with another person draws up either a partnership or shareholders agreement but so few take our advice.
I think the reason is twofold, firstly no one wants to get bogged down in this sort of detail at the start of a new venture; there are far more interesting things to do. And secondly the cost of solicitor’s time can be prohibitive to a new venture.
However, these agreements really do pay for themselves, down the line, when trouble looms.
I have seen numerous examples of clients who have found themselves at logger heads with their partners and come to me for advice. A recent example is a client of mine who started a limited company with a friend of his.
When I asked about an agreement they nodded and mostly ignored me. Only one year later one partner decided to leave the business for a trip around Europe that would last six months but still wanted paying from the business profits.
The other partner understandably was not happy with that and wanted to exit but there was no agreement in place to fall back on, they couldn’t agree terms and so there was deadlock. Things went rapidly downhill from there and this ultimately cost them not only their business but also their friendship.
If there was an agreement laying down what would happen if one party wanted out then deadlock would be avoided. And maybe their friendship would have been saved.
The agreement.
The minimum content you should have on any agreement between business owners is:
What are the roles each person will play?
What hours will they do and what task will be there responsibilities?
What happens in the event of:
- One partner dying
- One partner being too ill to continue
- One or both partners wanting to exit
- One or both partners falling out and disagreeing on anything Dividends, Staffing, Purchases etc
- One partner being sent to prison or being declared bankrupt
Details of how disputes will be resolved.
Try to think of all the scenarios that you may come up against and then agree what the outcome should be.
This list is not exhaustive so be creative and think through everything you can, believe me though when things go wrong and problems need to be resolved you will be glad you did some leg work in the first few weeks.
How we can help
We have negotiated some excellent rates on the preparation of Partnership and Shareholder agreements. If you feel you would benefit from and agreements email me: will@accsysltd.co.uk for more details.
