Success can be a major problem

A big problem for small business is success. Say you have gone into business with an equal shareholder (a partner) and managed not to go bust in the first two years. 

With success comes a need for structure to maximise the benefit of your successful business idea. A first step is to introduce a written shareholders’ agreement. 

Without one you are looking for trouble if your partner is undisciplined, dies, goes gaga, becomes bankrupt, decides to leave, wants to set up on their own next door taking the business (without you), or is just too generous with company information. A shareholders’ agreement will help in resolving disputes or if you want to bail out. 

There is no standard shareholders’ agreement but here are five possible benefits of having one-

1.   Strict guidelines for transfer of shares. You get to choose who you are in business with.

2.   A set procedure for valuation and purchase of shares if your partner should want to leave, is ill or dies, or becomes bankrupt. You can arrange insurance to cover the ill or dead shareholders’ share, or the agreement can provide for the shares to be purchased over a one year period to ease the burden.

3.   A budget and business plan established at the beginning of each year to set a direction for the company. This is important if your partner is a bit of a free spirit, especially with the chequebook.

4.   For mediation of disputes. As much as you may enjoy slapping a writ on your partner, disputes are best resolved by mediation— at first anyway.

5.   For restraint of trade and confidentiality of information.

Why don’t all businesses have a shareholders’ agreement? Because they can be thirty pages long, raise difficult issues, are very dull and worst of all, they cost money. However, if trouble breaks out they can deliver peace of mind.

Extract from "The Law is an Ass—make sure it doesn’t bite yours!