You’re excited. You’re about to embark on a wonderful new opportunity – you’re starting a new business with a new business partner. You feel hopeful and optimistic. Nothing can go wrong, right? But things can and do.
Business relationships, like all relationships in life, go through ups and downs and sadly, break ups too. Working with a business partner or partners means that your financial affairs, career and livelihood will become intertwined … sometimes to a much greater than you may realise.
Before embarking on your new adventure, it’s really important you talk through a variety of issues with your new business partner. This will protect both of you if something goes wrong in the future.
Opening up a dialogue about important issues is a great starting point. But it’s also vital the agreements you make are documented clearly in a written agreement. The type of written agreement you make will depend on the type of business you have as well as some other factors, such as your tax situation and the level of asset protection you require. For example, if your business is operating through a company, the agreement would need to be formalised as a ‘shareholders agreement’.
To help you move forward with your initial discussions with your new partner/s, here are 8 important things to consider:
1. Business objective
What is the goal or objective of your business? It sounds simple but you would be surprised how often people have different ideas for a business when they think they both have the same one! You are more likely to run into conflict if you don’t agree on the basic business objective and strategy. Try to get into your business partner’s head at the very start to make sure you are both ‘on the same page’.
How much will each person get paid? If circumstances change in the future – i.e. the business makes an increased profit – how will this be split? Will you each be paid a base salary plus a percentage of profits? If so, how much? Try to think of as many scenarios as possible for this point as money is usually the number one cause of a business breakdown.
How much will each person contribute – both in money and time – to the business? How many hours is each person expected to work? Will this include overtime, on-call time or weekends? How will each person be held accountable for their responsibilities?
4. Protection of the minority
If one person or shareholder has a minority stake in the business, how will you ensure their voice is heard on important issues?
5. Selling out/New business partner
If a partner wants to sell their stake in the business, do they have to offer it to the other partners first before approaching a third party? If not, does the remaining business partner have any say on who the new partner will be?
6. New Investors
What happens if you want to take on a new investor? Should there be criteria they must meet before being considered? If they come on board, will everyone’s stake in the business be diluted to accommodate them? Will new salary and profit percentages need to be drawn up?
What is the procedure for resolving conflicts? Think through the steps of a potential conflict and talk about what you would wish to happen at each stage. For example, if you can’t come to an agreement on an important issue, would you seek mediation services? What happens after mediation? Would you seek legal counsel?
8. Mandatory sale
Are there any circumstances in which a business partner could be forced to sell their stake in the business? For example, if you get a great offer by someone to buy the business but they require a 100% stake, can you force your partner to sell?
This list of 8 items covers some of the most common problems however speaking to a lawyer may be also be beneficial. They might be able to offer you advice about areas to discuss you may not have considered. They will also help you formalise your agreements. Even if you don’t seek the services of a lawyer, talking through the above 8 points in advance will make sure your business relationship starts off on the right foot. This will help you create a much tighter and hopefully, more successful, business unit.
Keep in mind the information in this article is no substitute for legal advice. We hope you found this information helpful but should you need further assistance with your business contract, please contact us at Know the Law.
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Adam Ahmed is an Australian international tax lawyer. Adam has over a decade of experience working at 3 of the big 4 accounting firms and one of the top tax law firms in Australia. He is currently the managing director of Adam Ahmed & Co. This article is reproduced from Adam Ahmed & Co.