30 September 2019
Business Pre-nups
I often see business partnerships come undone when a personality clash develops between the partners. They start the business with high hopes and a common purpose, but the ups and downs of business life reveal that they don’t get on as well as they thought. Sometimes in a partnership one of the partners is no longer pulling their weight. Even worse, I have seen situations where a partner has been making a profit on the side using partnership assets. In this blog I discuss business pre-nups.
When trust breaks down
Above all, a partnership requires trust, and a meeting of minds about how the business will be run and the direction it is going. When trust breaks down, how easy is it is to bring the business to an end?
That all depends on how it was set up in the first place.
When a partnership has been formulated properly from the start, it will have a written agreement or partnership deed. That should set out a system for dealing with disputes between partners. The deed may specify voting mechanisms and arbitration clauses. It may well specify how the partnership is to be brought to an end, for instance with an agreed process for an independent third party to value the business, so that the departing partner’s share can be determined without argument. It’s like a pre-nup for business.
If there is no partnership deed, then every partnership defaults to statute law. Unfortunately, that means that when a partner leaves, the partnership must be dissolved – even if it is otherwise a thriving business. While the remaining partners can easily start a new business, and try to pick up the pieces of the old one, they will still need agree with the departing partner about the sum owed to them. If no agreement is possible, then the partnership assets must be sold off.
With goodwill on both sides the separation can be achieved relatively painlessly. But if the parties have fallen out, and perhaps blame each other for the breakdown in relations, that rarely happens. I have seen disputes about partnership assets end up in court proceedings going on for years. This is ruinously expensive and, perhaps worse, it takes time away from running the business.
The need for proper structures
To avoid this potentially disastrous situation, I always advise businesses to put proper structures in place right at the start. There should be a partnership deed, or if the structure is a limited company a shareholder agreement (in addition to the memorandum and articles).
No-one starts a business believing that they will fall out with their partners. But it is sensible to have a structure in place just in case that happens: hope for the best and prepare for the worst.
Notes
For more information about how to resolve disputes in partnerships and limited companies, click here.