Good fences make good neighbours and good partners need good shareholder agreements.
Legally, if you want to get into business with a friend or relative, you can just go ahead and do so. A simple handshake, and maybe a trip to the bank to apply for some start-up cash, and you’re all set. (Although you may want to check off these boxes before even choosing a business partner.)
The problem with this approach to starting a business is that a business arrangement is different than a friendship. Business partnerships are fraught with opportunities for disagreements, misunderstandings and/or unexpected events.
The solution to avoiding disputes and problems is to write and sign a shareholder agreement. A shareholder agreement turns a friendship into a formal working relationship. And while you can remain friends, a shareholder agreement sets parameters on the working relationship by laying out the rights, privileges and obligations of each partner, as well as sets the foundation for how the business will be managed and run.
It also outlines the conditions that will end the business partnership. Because every partnership eventually comes to a planned or unplanned end. Without a formal shareholder agreement, what would happen to the business if one partner unexpectedly died? In this case, the deceased’s shares become part of the estate and the surviving partner would suddenly find themselves in business with his or her former partner’s spouse.
This is one worst-case scenario that you must protect your business against but shareholder agreements are so much more valuable than simply a defence against the unexpected. Think of it as a pre-nuptial agreement and divorce agreement along with an operating agreement. A good shareholder agreement will (among other things):
· outline the initial financial contribution of each partner
· determine the division of labour between the two partners
· decide what happens if one partner wants to end the partnership
· outline how the sale of the business would be handled
· determine a chain of command should one partner die or become disabled
The important thing to remember with any shareholder agreement is that, like a will or life insurance policy, it cannot be written and then forever lie in a drawer. Over time, certain areas or circumstances may become out-dated or irrelevant and other areas or scenarios may be overlooked because they weren’t a factor at the time of writing.
Set aside time at least once a year to review your shareholder agreement with your partner. It may not need to be updated yearly, but by reviewing it, you’re ensuring that you and your business are always well protected.