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.

Conclusion

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.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.