When you and your business partner start on a new venture, there is very rarely time to stop and consider what the end of that relationship will look like. Will the business become hugely successful and be bought out by a much bigger company? Will you both have the same priorities and vision that you have now? Or will something happen down the line to render your working relationship no longer tenable?
It may seem ‘doom and gloom’ to consider these options at the beginning (it’s reminiscent of getting married and signing a pre-nup), but the smart move for those going into business with others is to address these concerns from the start, and plan for the end of business before it has begun.
What it looks like in the beginning
When two or more business partners come together, they generally have the same vision for the business – otherwise, building a partnership wouldn’t make a great deal of sense. It is also likely that the business partners will be in roughly the same stages of their lives, with the same personal priorities. This will allow business partners to work well together, and grow a prosperous business.
Why things might change
It is likely, as time moves on, that those involved in a business will start to have different (and diverging) priorities. One business partner may have children, and have to take a step back from the day-to-day; the other may want to put all of his or her time into the business, and grow it exponentially. This can result in responsibilities falling predominantly on one individual’s shoulders, which may create a very different scenario than was envisaged at the outset of the business.
This is not the only possibility. Business partners may also significantly disagree over business, or even personal, matters. It may no longer make sense for them to work together.
Or one of the business partners may fall ill or die (and, to protect against this, it is highly advisable for businesses to invest in key person insurance).
Whatever the reason, it is not generally the case that things stay the same forever, and businesses are often forced to adjust and take account of different business visions, and different lifestyles of their founders.
How does a smart business owner protect against this?
I mentioned previously that intelligent business owners will plan for the end, at the start. So how can this be done?
This will be dependent on the type of business involved, although the principles are the same. If the business is a limited company, a shareholders’ agreement should be prepared; if the business is a partnership, having a partnership agreement in place is advisable.
These agreements will cover matters such as each business partner’s investment, responsibilities and ongoing return from the business. A good agreement will also address the following:
- What happens to the business licences, name registrations and intellectual property upon transfer or discontinuation of the business?
- The fact that, when a business partner leaves, he or she should no longer be responsible for the financial obligations of the business once he or she leaves
- Whether the remaining partners shall have the right of first refusal to buy the exiting partner’s equity share
- Whether the company/partnership itself shall have the right of first refusal to buy the exiting partner’s equity share
- How an exiting partner’s share in the business will be valued
Uncertainty is one of the most crippling influences on the success of a business, and in-house uncertainty can be just as problematic as external factors. It is highly advisable that an agreement such as this is dealt with at the start of business relationship, and not left on a ‘to do’ list until a later stage.
The author of this blog post is Barbara Jamieson. Barbara Jamieson is qualified in Scotland, New York and California, and has worked at top Scottish law firms Maclay Murray and Spens LLP and Brodies LLP. Barbara also spent three years working in-house at investment management firm Martin Currie, advising on financial services and commercial contracts.