How to create a shareholder or partnership agreement
Nine out of 10 small businesses fail within the
first three years. If you are starting a business with a partner or
shareholder, you need to make sure that you have contingency plans
in place should your venture go awry. BDT Corporate's Terence
Healey is an expert on business exits: he has seen first-hand the
damage when partnership agreements are nelected. Here is Healey's
eight-step plan for protecting you and your
If you are starting up a business with other people or reviewing
your existing agreement here are some useful steps to think
Stage 1: How much time do you want to commit?
Before you even put a business plan together, sit down on your
own first and look at what you want from the business and how much
time you personally want to commit.
At the start of a new venture, human nature makes it easy for us
to commit to 12 hour days. The times you need to consider are the
cold and dark mornings in January and February when you have to get
up at 5am to be in a three-hour meeting that will incorporate a
six-hour round car journey. After which you will be expected to
produce reports, emails etc before the following day. Now for some
of us that is fine. For others, work-life balance is very important
due to family and social commitments and 12 hour days are simply
Stage 2: How much money do I want to commit or
A money commitment can be a capital injection from your own
personal finances, a loan you provide a guarantee for or simply the
time you are prepared to work for the business without receiving a
salary. No matter what method you choose, decide at what level you
are prepared to invest in the business and then how much you want
to receive from the business.
Stage 3: What responsibilities do you want?
Are you going to be a silent partner? If you are going to be
responsible for the running of the business, are there certain
tasks or parts of the business you will take care of on your own or
will it be a joint responsibility? What also happens if you fail in
Stage 4: How are decisions made?
Do you take a democratic approach to decision making? Are
there certain areas of the business you make decisions on and not
on others? Put some thought into trying to make the decision
making process both effective and efficient.
If there are only two of you in partnership/shareholding then
you may wish to think about using a third party to help you.
Alternatively, if there are more than two of you, should agreements
be made on one person one vote, or will it be pro rate on the
percentage of shares held?
Stage 5: What happens if agreements cannot be
If an agreement cannot be reached, this is where the trouble
begins. How will you resolve differences with minimum impact to the
business and your own working day?
The answer to this is not an easy one and sometimes it pays to
have an external person mediate. In dramatic circumstances it can
mean the company is put up for sale, dissolved or simply closed.
Before you hit the nuclear button it is best to give this very
Stage 6: Present your answers to you perspective partners
Meet with your colleagues and discuss whether their wishes and
expectations are compatible with yours. Remember to record what is
Stage 7: Get the agreement drawn up and signed
Find a good commercial lawyer and present them with a record of
your meeting and ask them to draw up a draft agreement.
Once the agreement has been reached and signed then you are able
to concentrate on the business and drive the sales forward.
Thinking things through might not guarantee that there are no
problems, but if there are you will have a process to sort out
those issues and a code of conduct for you all to work by.
Why in writing? Well, a document is more reliable than our
memories and if situations occur, which they frequently do, it is
hard for one party to change their mind if it is written in black
Stage 8: Review the agreement
Don't just let that document gather dust in a drawer somewhere.
Both in business and in our personal lives, there is constant
change. At least once every twelve months you should carry out a
review of the document to see if things are still relevant to you
all, just as you should review a business plan annually. If there
are things that need to be changed then doing it when relations are
good will make the whole process easier.
There are no guarantees that despite best intentions, you and
your business partner may still decide to split. If you recognise
that such an event may happen, no matter how remote it may seem at
the beginning of your business relationship, you have the best
chance of parting on good terms.
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