When friends, family members or co-workers are running a business together, it can be tempting to just trust that everything will be fine, no disagreements will arise and you will always be able to sort things out.
No matter how business owners get along, having an agreement that documents how the shared ownership operates can help in avoiding misunderstandings and set your business up for success, often adding value as the future is clear.
Often called shareholder agreements, partnership agreements or unitholder agreements, (depending upon the structure of your business) these agreements can be more than just a contract, they can help set guidelines and expectations for how you run your business.
As a commercial lawyer, the types of things I assist business owners sorting as part of an ownership agreement include:
1. When you want to exit the business
A shareholder agreement can set you up for when you are ready to exit the business by:
- Setting out how shares will be valued and transferred when someone wants to leave.
- Incorporating Life & Total Permanent Disability (TDP) insurance for key people in your business so that if someone is unable to work or dies, both the business and their family are financially protected.
2. When there is a disagreement
In any business with multiple owners, disagreements can occur, often when you least expect it. Having clear mechanisms in place to resolve these disputes makes a shareholder agreement invaluable by:
- Providing dispute resolution mechanisms to ensure people try to sort the issue without needing to go to Court
- Avoiding reputational damage
- Ensuring confidentiality
- Offering clear exit strategies if the result of the dispute is for someone to leave
3. Managing expectations between owners for day to day management
An ownership agreement can be used to clarify roles and responsibilities, who can make decisions, and how they will be decided at both the shareholder and director levels.
You can set out clear procedures for how major decisions will be made, such as developing or updating your strategic plan, annual budget and entering new contracts. This can prevent disagreement, ambiguity and indecision.
Setting these expectations upfront can often be a relief!
A well drafted shareholder agreement should address the following:
- Define shareholder and director’s roles and responsibilities
- Include decision making procedures
- Cover voting rights including in the event of a deadlock
- Cover director’s remuneration and dividend policies
A comprehensive shareholder agreement is one of the smartest investments you can make in the long term cohesion and success of your business.
Has this article got you thinking about your shared agreement?
If you would like to talk to one of our business lawyers about a shareholder agreement that is tailored to your business, contact OFRM Lawyers business law team Lachlan Edwards, Brian Hill or Madison Donald on 03 5445 1000 or book an appointment online:
