Why having a shareholders’ or partnership agreement is vital

When people join forces to ‘go into business together’, it is human nature to assume that all will continue in the initial state of optimism and collaboration. However, from my years of advising business owners, I know too well that there is the potential for things to sour, and disputes can be messy and turn nasty.

That’s why I am passionate that businesses should have a written shareholders’ or partnership agreement in place at the outset. The best-case scenario is that once the agreement has been signed off it sits in the bottom drawer and is and never looked at again.  However, if matters do go awry it is essential that it is there to refer to.

Facilitated correctly, the agreement will be in the best interests of all the parties as well as the interests of the business. The decisions agreed early on are when the partners or shareholders are in a neutral and generally positive frame of mind.

At the time of a dispute, I know that it’s much harder to get an agreement that everyone is happy with. From personal experience, I also know that even when an agreement is in place, dealing with an unexpected event such as a partner’s sudden death or retirement, can be emotional and difficult so having that agreement in place is very helpful.

An agreement is a legal formal document so needs to be signed by all parties to be enforceable. But it is a voluntary, optional document. That said, I suggest it’s a vital one that should cover a whole host of expectations. It can be as simple or as detailed as the parties want.

These are a starting point for discussion:
  • How will any dispute be managed including what happens if there is a deadlock in thinking between parties?
  • How much will each party be paid, and for doing what?
  • How will the business be structured, the day-to-day operations, how many directors will there be, and the remuneration for the directors?
  • How will shares be dealt with if one party wants to sell. For instance, if pre-emptive rights are established in the agreement, the remaining shareholders are offered the shares to purchase before they are offered to a third party. This may be particularly important in smaller companies where the shareholders only want to deal with others they know on a personal basis.
  • How will a shareholder be removed – what are the grounds for expulsion, the process, and timeframe?
  • What limits should be in place to specify who has authority to make certain decisions such as taking out loans, making significant business management decisions?
  • How profit will be distributed? And what happens when there is no profit?
  • If a daughter or son is coming into the business for succession, how long will that process be, when will payment/s be required, what will the roles and workloads look like over what timeframe?
  • How will a silent investor / partner be remunerated, what support will they provide and in what form, what process will the active partner follow to purchase more of the business?
  • If one party dies, will the business continue with the estate as a partner and if not, what process will be followed to ensure the right value is placed on the business, so the deceased family is protected and, if it’s a family business, the family dynamic remains positive?
Essentially, an agreement provides peace of mind, it can take a lot of stress out of what is usually an emotional situation. There is certainly a time and cost investment involved, plus the need to consider some potentially gnarly worst-case scenarios, but to my mind not having an agreement sees the potential for legal fees to gobble up a significant amount of money and cause considerable friction and distress.

If you’re starting out in business or can see the value of establishing an agreement ahead of any need, we’ve got the experience to help. Contact your Moore Markhams advisor here.

Prepared by Bruce Stormer, a Moore Markhams director. Bruce has a keen interest in working with business owners to help them achieve their goals, providing financial management advice and working as a business coach for many clients.