|
Businesses co-owned by friends or family members commonly come unstuck when relationships between owners start to fray. Drawing up a shareholders' agreement is the best way to prepare for the worst, writes Aengus Collins
There are many reasons for wanting to set up in business with other people, particularly friends and family. But it brings its own risks too, including the legal, administrative and financial complications that can follow if the relationships underpinning the business fall apart. Being prepared is the only effective way of dealing with these issues, says Rupert Merson, a small-business specialist with business-services firm BDO Stoy Hayward. For the co-owners of a limited company, that means drawing up a shareholders' agreement. (For partnerships, a partnership agreement fulfils a very similar function.) However close you are to your co-owners, you should set things up with them "with as much formality as if you were going into business with your enemy," explains Merson. "I'm a big believer in something Rockefeller said: 'A friendship founded on business is better than a business founded on friendship'. Shareholder disputes are a very common disruption faced by small businesses - but only a minority are adequately prepared in advance." The contents of shareholders' agreements vary widely between businesses. They can be drafted to implement whatever the wishes of the owners are - which is easier at the outset, when everyone is on good terms, rather than waiting until communication may have broken down. One way of preventing disputes further down the line is to use a shareholders' agreement to set out what the different founders of a business will be required to contribute and what they get in return. Merson's view on this point is that an equal share of the equity for all the founders isn't necessarily the best option. He suggests that equity should go to people who have put either money or great ideas into the business, but that hard work is more appropriately rewarded with a good salary and bonuses. Crucially, the shareholders' agreement can be used to set out what will happen if one co-owner wants to exit the business: - Many agreements include 'good-leaver/bad-leaver' provisions which stipulate that bad leavers - who deliberately haven't contributed to the business's success - receive much less for their stake than a good leaver.
- Agreements can ensure that anyone who sells up must offer their stake to the other existing shareholders before approaching outside investors.
- Agreements can be used to avoid conflict over the valuation of a business, by specifying a formula or a process to be used to value any equity being sold - perhaps with reference to company revenues or net asset value, for example, or by delegating the task of valuation to the company's auditors.
It is not a legal requirement to have a shareholders' agreement, but it is best practice. It forces co-owners to ask the difficult questions of each other while they're still on the best of terms.
|