Business partners are familiar with putting in place arrangements which protect the business they are building together. Those arrangements might include written contracts with suppliers, insurances, hedging terms or health and safety policies.
But often the importance of protecting the ownership interests themselves is overlooked. This may be because there is never the time to think about it, or the value in doing it is unclear, or there’s confusion about how to go about it and who to involve.
A shareholders’ agreement is the starting point. This is an agreement which sets out how the shareholders will interact with each other and how they will run the business. It can formalise what is currently happening or it can set a template for how things will be done in the future.
Typically it will cover matters such as decision-making, funding, new shareholders and exit.
The process of discussing, agreeing and documenting a agreement will bring out answers to questions that may well be hanging in the air between the shareholders, such as:
• What is our policy on taking out profit or reinvesting in the business and is it likely to change?
• Does the business need new investment and where will that come from?
• What should happen to my shares if I die or want to move on – and what would happen to the shares of a fellow business owner if this happens to them?
• What is my exit strategy?
• Would I want there to be an option to buy those shares and how would that be paid for?
• What are the big events and decisions in the business which are likely to be coming up in the next few years and how should they be handled?
An agreement which is thought through and well drafted gives the owners certainty on these and other matters and helps to provide security over the ownership of the business and for the business itself.
Even where a shareholders’ agreement has been put in place in the past, often it is in need of a revisit to reflect changes in circumstances or changes in priorities of the owners.
Unfortunately choosing not to deal with these matters until they become “live” all too often leads to unexpected and unwanted outcomes for one or more of the owners and, in some cases, expensive litigation.
• For more information on the issues raised by this article, contact Gavin Maddison at firstname.lastname@example.org or on 0113 205 6762.