Business success is a wonderful thing - cash flow is strong, debtors are small, the partners in the business are all pulling in the right direction and the business is prospering. At this time there is strong cohesion, a sense of unity and a positive business future before you.
But the strength of a business is not always measured by its success in successful times. How businesses deal with adversity is often more important - because failure to manage the business at this point could bring the business to a crashing end.
When starting a business with a family member, friend or business colleague, it is important not only to consider the potential success of the enterprise, but to pay careful attention to how the business will be managed in tough times. The following is a list of questions that should be asked at the time you are setting up your business. If you are able to answer these questions confidently at the beginning of the relationship, and evidence them in an appropriate legal document, then the chances of your business failing will be minimised. Remember, the mere fact that you are going into business with a family member or friend does not guarantee an ongoing and positive relationship.
- Have you spoken with your legal and financial advisers on the best structure for your business?
- Have you considered ways to protect your personal/family assets?
- Goals - What are the benchmarks you are aiming for?
- What are the obligations of the partners in relation to the business?
- Do you agree on how to get there?
- Long term or short term growth profit?
- How is capital funding to be met?
- Unanimous or majority control?
- Should there be non-executive directors?
- What if one party wants to leave the business?
- Is this permitted?
- How much notice must be given?
- Can the leaving party sell their interest in the business to a third party
- What if the continuing partner cannot afford to pay out the leaving partner?
- How is the interest of the leaving partner to be valued?
- Was any financial contribution to the business made by way of loan or was it a capital injection by that partner?
- Can the leaving partner simply transfer their shares to a third party?
- Does the leaving partner have the ability to set up in competition after they have left?
- If one partner leaves does this necessarily mean that the business should be wound up?
- Who will keep the name of the business if one partner departs but wants to stay in the same field?
- How do you deal with any personal guarantees given by the leaving partners?
- Can one party force another party to leave?
- Have the parties complied with their respective obligations?
- How do you measure performance?
- Does one partner have control over the operations of the business?
- Who has the final say in management?
- How is the business to be managed overall?
- Will the directors agree to provide personal guarantees for company debts?
- Who has control?
- If 50/50, how are deadlocks to be resolved?
- Can family members be employed in the business?
- Who dictates the level of pay of the partners?
- How will the business attract and maintain clients?
- Who will be responsible for business development?
- What occurs if a third party wants to buy the business?
The reality of most business relationships is that the party who can provide the most financial support is the party who retains control over the enterprise. This is ordinarily the case even if the other party’s contribution in time or skills is essential to the success of the enterprise.
These issues should be dealt with at the beginning of your relationship. There should be a written agreement between each of the partners, a business and marketing plan should be prepared and a budget put in place. If all these things are in place at the beginning of the relationship, then chances of a dispute arising is minimised and if a dispute does arise, it will be more easily dealt with.