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In my experience, costly disputes between business partners are far less likely to arise where the deal is properly considered and documented at the outset. If you do it on a handshake, not only do you run the risk of a party reneging on what was discussed, but you will also miss things you didn’t even know about. If you’ve seen the Social Network, about the history of Facebook, you’ve been given a taste of how people’s recollections of what was discussed years earlier can differ.
I know of business partners who were longtime friends and went into business together where it was agreed on a handshake that everything would be done “50/50”. Without any further ado, they got stuck into the launching of the business. One of them now works 7 days a week in the business while the other shows up when he can get away from his other commitments. A conflict arises because from Party A’s perspective, the 50/50 arrangement isn’t fair anymore because each party’s reward is not a fair reflection of effort. At the same time, Party B sits there and says “well he knew when we went into this that I wouldn’t be able to dedicate time to the business – I wouldn’t have done it 50/50 if I had to work full-time in the business”.
The solution to the problem is for the business to pay Party A a wage for the extra time he spends in the business. If they can’t agree on that, they are headed for a costly shareholder’s dispute that could ruin the business and seriously damage their respective financial positions.
Things get really ugly when the business goes badly. I have seen business partners go “50/50” in a property development which tanked. They had only agreed on how they would share the profits and hadn’t turned their mind to the possibility it would run at a loss. They also didn’t agree on whether the money they had each tipped into the project would be treated as loans or equity. Had they agreed on how to share the losses they could have extricated themselves from the situation with small losses each. Instead, their losses will skyrocket because they end up in a lengthy legal dispute.
The other problem I see, particularly when businesses become a success, is that the business was structured the wrong way to begin with. If you accept an offer of $1million for your share in the business in 5 years, you might be stuck with a capital gains tax implication which could have been avoided or significantly reduced if you’d taken some structuring advice at the outset. Problems can also arise when you start to receive dividends from the business if it becomes a success. Should the shareholder be you, a company or a trust? It all depends on the circumstances. Alternatively, the business might be eyed off by another business down the track for a merger. The corporate structure may mean it’s not feasible and it can be a very costly exercise to change the structure once the business is already up and running. Whether you are planning on ‘going it alone’ in business or partnering with friends or colleagues and whether you are an experienced business person or a first timer, the temptation to just get the ball rolling and work out the details later should be avoided.
Getting started properly normally requires some consultation with an accountant and a lawyer. I appreciate that funds are almost always tight at the time of the commencement of the new venture, so I am always prepared to have an initial meeting with you free of charge and discuss flexible fee arrangements.
Tom O'Shea | Partner | +61 7 3238 0605 | firstname.lastname@example.org