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Co-Owned Businesses: Why you need a business ‘pre-nup’ …. and what to do if you don’t have one.
Sport and business have many similarities. A championship winning sports team generally wins because the team runs like a well-oiled machine, where each team member knows their role and their responsibilities. Having that agreed framework reduces the scope for conflict, particularly during times of stress or adversity. The same can be said about co-owned businesses. Operating a co-owned business without a co-ownership agreement is like an AFL team with 22 roving midfielders. Lots of passion and intensity, but little defensive or offensive structure!
Why you need a business ‘pre-nup’
A co-ownership agreement governs the rights, responsibilities and obligations of each co-owner in relation to the business itself, the entity operating the business (e.g. the company) and the other co-owners. A well drafted co-ownership agreement defines appropriate boundaries of the co-ownership arrangement, and robust discussions between co-owners before and during the drafting process brings any co-ownership misalignments to the forefront.
What should be included in a Co-Ownership Agreement?
While every business and every co-ownership arrangement is different, we would expect that any robust co-ownership agreement would address issues set out in the table below, as a minimum.
The above are just some of the items that should be considered. The items will also vary depending on the structure of the co-owned business (i.e. a company, unit trust, partnership or family trust).
When is the best time to put a Co-Ownership Agreement in place?
The best time to put a co-ownership agreement is as soon as possible. Ideally, commencing a business or taking on a co-owner. Implementing a co-ownership agreement at the beginning of the journey (or, during the honeymoon phase) is often far more conducive to the parties having robust discussions without disrupting the business.
Also, it is also usually easier at the beginning of the co-ownership journey to align and adjust the co-owners respective expectations about what they are expected to put in to the business, and take out of the business. It can be difficult to realign after the business has already taken off and has a force of its own. That approach can also leave one of the co-owners feeling like the others are shifting the goalposts, and can be a catalyst for a co-owner dispute, causing the business to implode.
What to do if you don’t have one?
The best time to plant a tree was yesterday. However, the second best time is today. It is commercially negligent not to have an appropriately tailored, robust co-ownership agreement in place.
Sit down with your business partners and talk about getting a co-ownership agreement put in place. In our experience, this can also be a good opportunity for a transparent conversation about each co-owner’s long-term goals.
How to find out if your existing one is any good.
While cliché, the devil is in the detail applies here. While no two businesses are the same, a good co-ownership agreement should:
- ensure that key protections are put in place for all co-owners. The matters itemised in this article are a good starting point which will provide a baseline of protection. However it is important to consider whether there are any unique elements of your business, or the relationship between the co-owners, which require specific attention;
- be precise. Clauses that are vague have the potential to be misunderstood and for disputes to arise;
- generally make sense and be understood by all parties. If you do not understand clauses within the contract, then that is a serious issue. While this almost goes without saying, we often see clauses in co-ownership agreements that simply leave us scratching our heads because they create rights or obligations that are vastly different to what the co-owners intended; and
- be appropriately tailored to your business, after a series of robust discussions involving the co-owners, business advisers and the lawyers drafting the co-ownership agreement.
A co-ownership agreement, or business ‘pre-nup’, is a foundational document on which all co-owned business arrangements should be based.
Too often we see disputes between co-owners where the co-ownership agreement in place is deficient, stock standard (i.e. not tailored to the parties’ unique circumstances), or worse, non-existent. Many of these disputes could have been avoided, or their damage minimised, if the co-owners had turned their mind to a robust co-ownership agreement, as early as possible.