Category : General Business Advice
When entrepreneurs start a business together, it’s often a good idea to draw up an agreement beforehand. The following is a non exhaustive list of items you may want to consider when drawing up an agreement.
1) Profit split
It’s important to consider at the beginning how the business will share out profits between the partners. You may want to make allowance for partners putting in more of their own money, time or contacts. There are various ways of achieving this; for example paying interest on loans; preference shares; or an adjustment to the shareholdings; or use of differential share classes. We can advise on the full implications of each approach so you can choose what works best for you.
2) Work split
When one partner will retain an existing job, while another will work on the business full time, it’s advisable to clarify expectations with each other. Long holidays can be another source of controversy.
3) Voting rights
It’s possible to have profit share splits differ from voting share splits by using differential classes of shares. We can advise on how this can be done using differential share classes or by other means.
4) Exit strategy
What happens if the partnership doesn’t work out? Can one partner sell their share in the business to a third party? What happens if someone dies or wants to retire? We always recommend you agree on how to handle a worst case scenario gracefully.
One popular approach is to agree to appoint an independent valuer in certain situations so that the exiting partner’s interests are bought our by the existing partners. We can act as independent valuers.
5) Banking access
Partnerships are built on trust. But that doesn’t mean you cannot mutually agree to sensible controls – perhaps requiring two signatures to pay more than a fixed amount. Being a bank signatory is a highly responsible position. In an otherwise equal partnership, if one individual is a bank signatory, and the other is not, it is a significant asymmetry which may cause controversy later – we would suggest that finance is for everyone.
As well as agreeing on profit split, it’s important that partners agree on when those profits will be drawn from the business and paid to themselves personally. A common arrangement is to draw anticipated profit share by monthly standing order, with a periodic distribution once the accounts have been drawn up and the precise position of each partner is known.
Expenditure on items like business entertaining and company cars can be a problem, and it’s advisable that partners agree boundaries with each other.
7) Control over expenditure
We suggest that partners may want to think about what decisions are so important that they need to be taken together. For example, hiring staff, changing bankers, or signing contracts committing the company to a level of spending over a set amount could all be items covered in a partnership agreement
You may wish to seek expert legal advice rather than drawing up your own DIY agreement – the law is full of surprises.