by Dr Vince Giuca
Does your shareholders’ agreement adequately spell out what happens in the event that you or your business partner exit the business? In fact, do you have a shareholders’ agreement?
Eventually, all business partnerships – beyond the legal sense – will come to an end, whether this happens amicably or because of disagreement or death. Surprisingly, proper consideration of this critical issue is often left until the end when it is least able to be dealt with adequately.
A sound shareholders’ agreement, ideally signed at the beginning of the partnership, will cover three critical eventualities in the life of a partnership: parting on amicable grounds, separating on account of conflict, and ending due to death. The partners should make sure that they have adequately provided for business continuity no matter which of these possibilities eventuates.
1. Amicable Parting
Ideally, when a partner wishes to leave a business it is done in a civil and courteous way, and that the process itself does not lead to conflict. A good way to help ensure that a partner’s leaving is done amicably is to have:
- an effective dispute resolution mechanism
- good open and on-going communications
- agreed and transparent transition arrangements
- an agreed time frame
- a formula or process for establishing a fair and equitable price for the business
The use of an external advisor or mediator may help to ensure the separation process doesn’t go off the rails.
2. Unlocking Disputation
Where a major dispute has erupted or there is on-going conflict between partners, a process will need to be established to address areas of conflict. Fisher and Ury (1987) provide a useful and practical guide to principled negotiations developed at the Harvard Negotiation Project (see also Ury, 1993).
The negotiation process will need to cover the same areas as for amicable separation. However, the task is likely to be much more difficult and likely to require third party professional assistance, such as a qualified mediator.
The primary concern of the partners should be to maintain continuity of the business to avoid a major down swing in business performance. Conflict within a business is also likely to affect staff and family members as well as customers. Minimising the impact on those other parties is important.
3. Death of a Partner
In the event of a partner’s death, what would be the impact on:
- business continuity
- business assets, revenue and cashflow
- business loans
If there is a business loan, does the loan contract have a clause that puts you in default following the death (or disablement) of one of the partners? Many business loan contracts have such a clause.
Does the business have insurance to reduce key person risk? How quickly can your partner be replaced and what would be involved? What would you need to do and how much would it cost?
Consequences of Inadequate Provisions
What would you do if your shareholders’ agreement does not adequately cover the three critical eventualities outlined above and one of these eventuates?
Entrepreneurs tend to be over optimistic (see Cooper, Woo & Dunkelberg, 1988; Simon, Houghton & Aquino, 2000) and many will simply dismiss the question and take on action. However, after putting so much time, effort and money into your business, are you really prepared to jeopardise all that?
An examination of the risks associated with partner departures is a critical issue for any business. As a guide, you may wish to implement the following steps:
- Check to ensure you have a signed shareholders’ agreement. If not, put in place a process for developing one with your business partner.
- If there is a shareholders’ agreement, review it – or better still, have it reviewed by a professional advisor – to ensure that it adequately meets your requirements. Update it if necessary.
- Develop and keep up-to-date a succession and exit plan.
- Establish an annual process to communicate, review and document the business’ strategic issues with your partner, including the issues raised in this article.
These issues will be much easier to address when there is no immediate expectation of a partner exiting the business than when a business exit is pending.
- Cooper, Arnold C, Woo, Carolyn Y & Dunkelberg, William C (1988) ‘Entrepreneurs’ perceived chances of success’, Journal of Business Venturing, 3 (2): 97-108.
- Fisher, Roger & Ury, William (1987) Getting to Yes: Negotiating Agreement Without Giving In, London: Arrow Books
- Simon, Mark, Houghton, Susan M & Aquino, Karl (2000) ‘Cognitive biases, risk perception and venture formation: How individuals decide to start companies’, Journal of Business Venturing, 15 (2): 113-134.
- Ury, William (1993) Getting Past No: Negotiating Your Way From Confrontation to Cooperation, New York: Bantam Books
ABOUT THE AUTHOR
Vince Giuca is the Founder and Executive Director of Partners-in-Business Institute (PiBI), established to assist executives, managers and entrepreneurs with human resource management, workplace conflict, team and organisational development, partnership relationships and business negotiations.
Vince completed his PhD on ‘The changing role of the entrepreneurial founder in emerging fast-growth firms’ in 2012.
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