Going into business with someone is like getting married. You are agreeing to spend your (working) lives together, for better or for worse. Unfortunately, just as with some marriages, business relationships do not always end happily ever after and the fall out can be just as painful. Where the business is run by a husband and wife or is a family business, a business break up can also involve a relationship break up, which not only increases the emotional impact, but also the complexity of disentangling the different strands.
One way that you can take some of the sting out of a business relationship breakdown is to have a partnership agreement (or shareholders’ agreement, if you are a company). This is the business equivalent of the pre-nup. It sets out the roles of the partners, how they will work together and what happens if they want to split up. There is some anecdotal evidence that putting a partnership or shareholders’ agreement in place can actually reduce the likelihood of the business relationship collapsing, as the partners have a mechanism in place for dealing with disputes.
So what does a partnership agreement or shareholders’ agreement contain?
The first section of a partnership or shareholders’ agreement normally deals with the management of the business. This will often cover fairly mundane things such as how many meetings you have to have a year and when the accounts are going to be prepared. However, it will also normally contain a list of the decisions and actions which cannot be done without everyone (or a specific majority) agreeing to them. Without such a list, any partner (or director) has the right to make any decisions or sign up to any obligations on behalf of the business without consulting anyone. This list acts a framework for business decision making and allows everyone to feel more comfortable that their partner is not about to go off and risk the entire business on some “great” new idea.
The second section will normally deal with the exit of one or more of the participants. This could be for misconduct, death or serious illness or just one person deciding that they want to move to the Shetland Islands and become a sheep farmer. The agreement will provide a mechanism for valuing the exiting person’s share in the business and a process for how their share is to be bought out (particularly if there are three or more participants in the business).
Once agreed, a partnership or shareholders’ agreement is not set in stone. The participants can agree not to apply the provisions of the agreement if they prefer. This is often used where one party is exiting, but they don’t want to go through a formal process for valuation, because everyone has a pretty good idea what the business is worth and so they are happy to agree a price. In this case, the agreement will operate as a fall back if the parties cannot otherwise agree.
A partnership or shareholders’ agreement may seem like an expensive and unnecessary investment, particularly when you are starting up your business and money is tight. However, disputes are even more expensive and having to pay thousands of pounds to a solicitor can make an emotional split with your business partner even more traumatic. This is in addition to the inevitable downturn in the business’s performance as the participants focus on fighting each other rather than pushing the business forward.
All businesses with more than one owner should consider whether they need a partnership or shareholders’ agreement. If you think this might be you, contact one of our specialists to talk through the options. With 10 offices across North Yorkshire & Teesside, including York, Harrogate & Northallerton, you & your business are never far from our specialist business solicitors.