In business with others? Bringing in a new co-owner? Get an appropriate contract in place to protect the business and its owners. Otherwise, you may regret gambling on your ability to predict the future.
The future is inherently unpredictable. Businesses evolve. People’s interests, ambitions and circumstances change. Unexpected events occur. The best way of protecting a business against the unexpected is by putting in place a carefully tailored co-ownership agreement which provides a ‘rule book’ to manage difficult and unexpected situations.
Common elements of a co-ownership agreement include:
- forced exit – in what situations can a co-owner be forced to sell their equity (e.g. upon insolvency, breaching their obligations, ceasing to be actively involved in the business or failing to hold required qualifications)?
- death and incapacity – what happens upon the death or incapacity of an owner? Do the other owners have an ability to force a buyout of their equity for fair market value?
- restraints of trade – what restraints should be put in place to ensure that the co-owners do not undermine the business, either now or on the exit of a co-owner?
- sale to third parties – what process should apply if an opportunity to sell the business or equity in the business arises?
- decision making – what decision making thresholds apply? Will different thresholds apply to day-to-day operational decisions versus more significant strategic decisions?
- passive ownership – are owners required to work in the business? If so, what expectations do they need to meet?
- dispute resolution – how are disputes managed, and what process should be adopted to reduce damage to the business if a dispute arises?
- working capital requirements – who is to provide what funding and how will it be repaid (if at all)?
- unique pressure points – are there any unique pressure points for the business?
A co-ownership agreement, or 'business pre-nup’, is a foundation document on which all co-owned business arrangements should be based.
Too often we see disputes between co-owners where the relevant co-ownership agreement 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 implemented a robust co-ownership agreement.
Our usual approach is to:
- provide you with a clear and transparent fee quote;
- get context regarding your business, the co-owners and your objectives;
- have a workshop meeting with you to explore your preferences in more detail;
- guide you through our draft co-ownership agreement; and
- refine the contract until you are comfortable with the terms.
We pride ourselves on adopting a pragmatic and sensitive approach during these discussions. Our wealth of experience enables us to deal with challenging issues in a delicate manner.