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 shareholders.

If you are starting up a business with other people or reviewing your existing agreement here are some useful steps to think about:

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 not achievable.

Stage 2: How much money do I want to commit or earn?

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 those responsibilities?

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 reached?

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 careful consideration.

Stage 6: Present your answers to you perspective partners or shareholders

Meet with your colleagues and discuss whether their wishes and expectations are compatible with yours. Remember to record what is agreed.

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 and white.

Finally…

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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