Business Partnerships: When a Simple Handshake Just Won’t Do
About 30% of businesses in Australia are owned by multiple business owners rather than a sole owner. The relationship between these owners in many instances is governed by a hand shake. This is great while everything is going well but what happens if the owners’ relationship falls apart?
The need for a formal agreement.
When a business is generating a bit of income and has a sale value, a handshake agreement is fraught with danger. What happens when one owner wants to get rid of another owner? In this case, if there isn’t a formal agreement on how this happens, uncertainty arises, costs go up and the business itself is damaged. I have seen costs of hundreds of thousands of dollars incurred when an owner wants to get rid of another owner and there is no road map on how this can be done fairly. When marriages break up there is a Family Court, in business there is no such institution.
I have seen some really poorly drafted Exit Agreements which could be as bad as having a handshake agreement. So putting a good agreement in place is vital to provide greater certainty to all parties.
So what should an Exit Agreement contain?
The common reasons for an owner leaving a business include: retirement, serious Illness, bankruptcy, divorce, death and disappearance. However, a number of other circumstances can also be noted in these agreements such as: fraud, non-performance and absenteeism.
These agreements are there to be constructed by all owners in a business and if any of the above reasons for leaving aren’t comprehensive, additional exit provisions can be detailed.
Once the types of departures are noted, another key item to document is how the departing owner is going to be paid. Most businesses don’t have a lot of money sitting around waiting to pay out an owners’ equity. Money may have to be borrowed or cash found from profit over time.
Also the way an owner departs could determine how much is paid. If a person retires they’ll get 100% of their share of the business. On the other hand, if someone is absent then the payout may be 80% of the actual owner’s share of equity.
How the business is valued is another key item in an Exit Agreement. This has to be clearly spelt out so when an owner exits there is no dispute as to how the payout figure is arrived at.
What’s your situation?
Are you a business owner in business with other non-related people? Do you have an Exit Agreement in place covering how a voluntary departure of an Owner from the business will be handled? If not, what’s stopping you from getting this agreement in place?
If you do have an agreement in place, when was it last reviewed? Does it have some of the trigger issues I covered above, or are there some gaps?
The more your business is worth the more compelling the need to put in place a great robust Exit Agreement.
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