Being in Business with Other People - Issues for Business Owners
By Adrian Chaffey, Epitome Law

Are these the right people to go into business with?

If you’re thinking of going into business with someone else or perhaps with several other people, then the most important question is simply whether they are the right people. Will you together have the experience, the skills and the abilities you will need? And perhaps most importantly, do you trust them?

If the answer to any of these questions is no, then you should probably be thinking of doing something else.

Thinking about your relationships

However if you’re confident in the other people involved, or if you’re already in business with them, it’s still important to think about your relationships – about, for example, how you’re going to work together and how you’re going to run the business.

Avoiding difficulties

Often, when people fail to address these questions, they find over time that tensions build up and their relationships sour. For some individuals this can leave them with some difficult and really intractable problems.

One person’s difficulties

Epitome recently acted for a founder of a business, who faced just this kind of situation. Over the years he had brought other people in as shareholders and directors. But when he wanted to retire he found that the others wouldn’t buy him out, and they wouldn’t allow the sale of the business as a whole. Unfortunately he hadn’t thought through what he would do in this situation and it meant that the other shareholders could block what he wanted.

The positive side

Thinking things through at the outset should however help to avoid this kind of situation arising. But more positively, when people do address their relationships, it helps to align expectations, to avoid disputes in the future, and to give the business a strong foundation from which it can grow and prosper.

The key issues

Control

Partnership and shareholder arrangements are really about control. In a company this is especially the case where one of the parties owns less than 50%. But control issues are important even when shares are held 50/50. Each shareholder needs to understand what they can do, and what others can do.

Understanding who can do what?

You’ll need to think about how decisions are going to be made, about who will make them, and about who can appoint the people who are going to make those decisions.

Who will the directors be?

In a company the day-to-day decisions about the running of the business will be taken by the board of directors, so it’s important to agree who the directors will be and to understand how they can be changed.

Protection for for shareholders who don’t have control.

Often however shareholders will want to restrict what the directors can do. Shareholder agreements usually therefore contain lists of things that the directors cannot do without the consent of some or all of the shareholders. The list may include things such as borrowing money, and employing staff.

What will you do if you can’t agree on something important?

It’s important too to consider what should happen if you cannot agree. Some of you will want one thing and some of you won’t; it’s a key issue and you’ve reached a deadlock.
There are a number of ways to deal with deadlocks and we can discuss them with you.

What will you each put in, and how will you do that?

At the outset you’ll also need to think about who is going to contribute what, and how they are going to do that. In a company the owners will take shares, which they will have to pay for. But part of their contribution (probably most of it) is likely to be in the form of loans, which they make to the company. You’ll need to think about how much each person is going to put in and what will happen if the business needs more money in the future. Who will provide it? And what will happen if some shareholders are willing to contribute more, but others are not?

What will you each take out, and how will you do that?

You may also want to consider what you will each take out of the business and how any profits will be distributed. In a company with shareholders who work in the business, part of what each shareholder takes out of the business will be their salary. But if the business is successful and generates profits, the company will also be able to pay dividends. You may want to agree how much – what proportion for example – of the profits should be paid out as dividends. Ensuring dividends are paid may be a particular concern for non-working shareholders.

What will you do if one of you wants to leave? - thinking about transfers of shares

You’ll also want to consider what should happen if one of you wants to leave the business. In a private company, with only a few shareholders, you’ll probably have provisions which will restrict the transfer of shares. This is because shareholders don’t usually want other shareholders to be able to sell their shares to just anyone. They want rather to know the people they are in business with and to be comfortable with them. Usually this means that anyone who wants to sell their shares has to first offer them to the other shareholders and, if a price cannot be agreed, there’s then a mechanism for the price to be set by the company’s auditors, or an expert.

Will you force leavers to sell their shares?

Sometimes however shareholders may also want to require a leaver to offer to sell their shares to the remaining shareholders when they leave. It’s possible to agree arrangements that will allow for this.

What if one of you dies, or is incapacitated?

Similar issues arise if one of you dies or becomes incapacitated. You probably won’t want the husband or wife of the person who has died to become a shareholder in the company. Conversely the relatives of the person who has died will probably want to sell their shares and take the money.

Buying the shares of someone who has died

However this often presents a difficultly, particularly if the business is doing well and considerable value has been built up in it. How are the continuing shareholders going to find the money to buy that other shareholder’s shares?

Using insurance

One of the ways shareholders can address this is to take out insurance. If any of them dies, the proceeds of the insurance will provide the funds to allow the remaining shareholders to buy the shares of the shareholder who has died.

Selling the company as a whole

A different issue arises if one person wants to sell their shares, but the others are unwilling or unable to buy them. The person wanting to sell may be a significant shareholder, and they may believe they can find a buyer for the company as a whole who would pay them more for their shares than the other shareholders.

What if you can’t agree on a sale?

One way to deal with this is to include what is called a drag-along. Not all drag-alongs work in exactly the same way. Broadly speaking however if shareholders holding most of the shares want to sell the company as a whole, they can require the other shareholder to sell their shares too.

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Last updated: 03 oct 2010