One of the first things to do when going into business with others is to document your business arrangements. This document is called a shareholders' or partnership agreement (depending on whether you trade using a company or partnership structure).
These agreements are used so that everyone knows the rules about how the business will run and — unfortunately and often more importantly — what happens when things aren't going so well. An agreement will generally assist owners who do not have control of their business.
For instance, five people with a 20 per cent interest each will not have any control, whereas one owner with more than 50 per cent generally has control over the other owners. The only way the others have any say is to have an agreement.
It's important the agreement is negotiated at the start, because bargaining can become difficult if the agreement is negotiated when things start to go wrong.
The agreement should contain a number of clauses which include:
• Type of business operated
• Funding of business
• Dividend policy
• Cost sharing arrangements if applicable
• Working owners' remuneration
• How key decisions are made, particularly if an owner has an interest in a proposed transaction
• Dispute resolution
Many more clauses are not mentioned here. All need consideration.
Where working owners are employed by the company, consideration should be given to whether they agree not to invoke any employment law in relation to their work. They are essentially owners and being an employee is a matter of administrative convenience. This should also apply to any family employed.
Get advice, and don't be tempted to do it yourself, as you may just end up with something that goes horribly wrong.
When one of the owners leaves the business, clear rules should apply. These can include whether there is a need to dispose of their shares if they cease working in the business, and the valuation of the business.
Wider issues to consider include things such as what happens on death and disablement or incompatibility.
There are various methods of valuing the shares in a private company. For example, there are premiums that apply where a shareholder has a controlling interest, and discounts that apply where a shareholder has no control. An agreement should state whether these premiums and discounts would apply on valuation, or if a value based on a proportionate interest would.
A compulsory retirement age is a vexed issue. Ideally, a business has a varied age range of owners, meaning well-spaced retirement and admission of owners, rather than many leaving at once.
Some owners may want to retire earlier than others. However, an owner who doesn't want to retire until a lot later does pose succession issues, and issues in terms of attitude to business in general.
There is no right answer, however, I believe rejuvenation is a good thing, and that a compulsory retirement age should be encouraged.
Business owners usually give guarantees to bankers, landlords and creditors. Once someone leaves a business, their guarantees should be extinguished unless there are good reasons that these remain. This highlights the need for all in business to protect their assets via a trust.
The shareholders' agreement is a good way of dealing with guarantees that have been given so that if they are removed, or if they are unable to be removed, the exiting owner should get a commitment from the remaining owners that they will meet their obligations.
To sum up, anyone in business with others should have an agreement in place before the business starts up, otherwise they might find it too late to influence how the business operates fairly.
So get advice, and don't be tempted to do it yourself, as you may just end up with something that goes horribly wrong. And lose some friends in the process.
Leicester Gouwland is a partner at accounting and business advisory firm Crowe Horwath
