How to Avoid Disputes Between Business Owners
Most businesses have more than one owner. While there are many upsides to multiple business owners, a key downside risk is that the owners will pull the business in different directions and ultimately end up in a dispute.
This article provides some tips on aligning owners to work cooperatively to grow the business and avoid disputes.
Impact of a Dispute
Disputes between owners of a business can be very damaging to both the business and the owners personally. In our experience, a dispute between owners can cause:
1. A major distraction from business operations;
2. Damage to customer relationships and brand;
3. Significant family and personal stress;
4. A forced buyout of an owner; or
5. The wind up of the business.
Given the severity of the damage caused by director disputes, it is no surprise that all directors want to limit their exposure. However, often business owners leave it until a dispute has already arisen before seeking help from their legal and financial advisors. Once the dispute reaches this stage, the directors have already limited the course of action to resolve the dispute. This is why we recommend implementing strategies and having legal documents in place from the outset to align the owners and reduce the risk of having a dispute in the first place.
The first step in arming yourself against a dispute is to be aware of some strategies to implement to reduce the risk of a dispute altogether. When starting a business, we recommend that you:
1. Identify and align your business: understand what each director is after and make sure they are consistent. For example, is the focus of the directors on maximising profit or being self-employed and take advantage of a work-life balance?
2. Clarify roles and responsibilities: understand what each director is responsible for (i.e. liaising with suppliers, being in control of the finances etc). Ensure that both directors understand their own responsibilities and what is involved in the other director’s duties.
3. Consider ‘what if’? You need to consider what happens in worst case scenarios such as who funds the business if the directors have no funds available to give, what happens if one owner wants to exit the business and what happens if the directors cannot agree on a decision regarding the management of the business. It is important when considering these options to ensure the appropriate legal document is prepared.
Once the strategies are considered, the owners should document their decisions in binding legal documents to govern how to deal with the worst-case scenarios. At the outset, we recommend having:
1. A Shareholder Agreement or Partnership Agreement: governs the owners roles, rights, responsibilities, obligations and liabilities to the business;
2. A Loan Agreement: if the owners intend on loaning money to the business, it is imperative that any funds advanced are covered by a Loan Agreement. The Loan Agreement should include how much monies are to be advanced, the interest rate (if any) and when the monies are to be repaid. To strengthen the directors’ security for payment, it may also be appropriate to have a General Security Agreement which gives the director the status of a secured creditor (meaning they will have a better chance of being repaid should the business be put into liquidation);
3. A Business Exit Deed (or include this in the shareholder agreement): this will govern the procedure for a director to leave the business. It may include how the director will resign, the amount to be paid for the director’s shares in the business, whether the director is to stay in the business to hand-over work and what happens if a director passes away.
We recommend seeking legal advice to ensure the correct legal documents are prepared and enforceable. If you need assistance from a member of our team, please contact us on (03) 9481 2000 or firstname.lastname@example.org.