Avoiding conflict when forming a business: probing questions for potential partners
Every year, several hundred thousand new businesses are created. In 2015, according to the Office for National Statistics, the total was 383,000—the highest recorded since comparable records began in 2000.
Many are sole traders, of course. But a significant proportion comprises two or more individuals coming together in some form of partnership: either as a limited company, or as a formal limited liability partnership, or as a traditional partnership.
Every year, too, many businesses fail, or cease trading. Often, that is due to factors such as adverse trading conditions, their proprietors retiring, or businesses being acquired and subsumed within larger operations.
Even so, significant numbers of businesses also fail or get into difficulties due to disagreements between partners, or flawed expectations about what individual partners will bring to the business, and how each partner will discharge their responsibilities.
Prevention is better than cure
Here at The Legal Director, it’s not uncommon for us to be called upon to help in such situations. But from the point of view of the businesses in question, it’s rarely good news when business partners need to resort to legal advice to resolve conflicts.
And sometimes, of course, those conflicts simply can’t be resolved: the disagreements are too great, and the gulf between the parties too great.
That’s why, as we have pointed out in a previous blog, it’s always sensible for partners to draw up a shareholder agreement, detailing in advance how the business is to be managed.
Which decisions have to be unanimous, or carried out through weighted majority voting, for instance? Who can sign contracts, and make legally-binding commitments? On what basis is remuneration to be decided? What procedures are to apply in the case of any proposed transfer of shareholdings, such as when a shareholder dies, or wants to retire? Are existing shareholders to be offered the right to buy? How is the price to be calculated?
It’s almost always preferable for such things to be determined in advance.
A no-obligation checklist for potential business partners
But while a shareholder agreement is vital means of resolving potential disagreements before they can escalate into actual conflict, shareholder agreements only apply once the decision has been taken to form a business.
At which point, of course, it may be too late: time and effort may have been expended on establishing a business that has little hope of success, due to as-yet unidentified sources of conflict between partners.
Which is why, here at The Legal Director, we have drawn up a no-obligation, free-of-charge checklist of questions, for potential business partners to ask themselves before they take the expensive step of actually forming the business.
You can download our 'Starting a Business Together Guide' here.
Think of it not as a shareholder agreement, but as a checklist of those issues that the shareholder agreement covers. In other words, the contribution that each partner will make to the business, their reward for doing so, how their responsibilities are to be discharged, and what legally-binding commitments they can make on behalf of the business.
One outcome of using the checklist is that key issues can be identified well in advance, and appropriate provisions made before trading commences, and conflicts arise.
But another—and equally valid—outcome is that potential business partners simply decide that the gulf between them is too great to be bridged, leading to a termination of discussions.
And the questions on the checklist are probing to bring about such an outcome, to be sure. Due diligence usually is probing. In essence, the checklist prompts potential partners to ask the question that is fundamental to any collaborative venture: do I really want to go into business with this person?
Because if the answer is ‘no’, then it’s better to know well beforehand.
So if you’d like a copy of the checklist, e-mail us, or pick up the phone, and we’ll gladly send it. It is of course free-of-charge—but even so, it could be the best business investment you make.
Posted Friday, April 28th, 2017 by Warren RylandTweet
Other Articles In This Category
- Persons of Significant Control: important changes to reporting requirements
It’s barely a year since the introduction of the PSC regime - and already, the compliance requirement has been tightened. And at a time when many businesses... read more
23rd of June 2017 by Warren Ryland
- Is your business at risk from the Uber decision? Why your self-employed contractors could really be employees
Fuelled by companies such as ride-hailing business Uber and personal courier firm Deliveroo, the so-called ‘gig economy’ is on the rise. So much so,... read more
12th of January 2017 by Warren Ryland
- The Legal Director - Commended for Innovation in the FT Innovative European Lawyers awards
Law firm The Legal Director (TLD) has been commended in the FT Innovative European Lawyers awards, which were announced at the beginning of this month. TLD ranked... read more
28th of October 2016 by Warren Ryland
- Debt versus Equity - Financing for SMEs
The need for additional finance is often the price of success for small to medium-sized enterprises (SMEs) that are looking to grow. The question that faces the... read more
14th of October 2016 by Warren Ryland
- The deceptive complexity of the Modern Slavery Act
At the end of July, Prime Minister Theresa May launched a cabinet-level government taskforce to eradicate modern slavery in the UK. It was, she said, “one of... read more
31st of August 2016 by Warren Ryland
- How our clients will benefit from the Bar Council's escrow account
Outside the narrow realms of consumer technology, there’s often an inevitable trade-off between cost and quality. In other words, you can have something at... read more
7th of July 2016 by Warren Ryland
- As the net starts to close, the Bribery Act prosecutions begin
As we have written before, the Bribery Act 2010 is a law with undoubted teeth. Fines are potentially unlimited, and custodial sentences can be up to ten... read more
1st of May 2016 by Warren Ryland
- New rules on shareholder identification are now in force
New rules on shareholder identification are now in force - and yet many businesses aren’t aware of them. Does your business have corporate or nominee... read more
12th of April 2016 by Warren Ryland
- First SRA-regulated law firm signs up to Bar Council's escrow account
PRESS RELEASE: The Legal Director has become the first law firm regulated by the Solicitors Regulation Authority (SRA) to sign up to the Bar Council’s... read more
31st of March 2016 by Warren Ryland
- Trade marks: the 3 biggest mistakes to avoid
Wander around a supermarket, or browse the advertisements in newspapers and magazines, and you’ll see trade marks everywhere. And it’s likely, too, that... read more
29th of February 2016 by Warren Ryland
- Avoiding flexible working's hidden pitfalls
You don’t have to look too far to see that traditional modes of employment are increasingly giving way to more flexible working arrangements. Returnee... read more
9th of November 2015 by Warren Ryland
- Are you paying your workers the right amount of holiday pay?
A recent ruling by an Employment Appeal Tribunal is set to cause many businesses a headache. Quite an expensive headache, at that. Simply put, it means that... read more
15th of July 2015 by Warren Ryland
- The Bribery Act 2010: are you running a risk of breaking the law?
To see the difficulties that businesses can get into through bribery - or even allegations of bribery - look no further than the reputational damage suffered... read more
11th of June 2015 by Warren Ryland
- It's official: "Lawyers are not cost-effective"
Imagine, for a moment, that when faced with a serious illness, significant numbers of people took no action. And of those who did take action, around... read more
20th of January 2015 by Warren Ryland
- Could a Shareholder Agreement save your business?
Here at The Legal Director, we’ve recently come across a business where the two co-founders have fallen out -- one is now leaving, in order to set up on his... read more
1st of December 2014 by Warren Ryland
- The high-fee culture that's hobbling British business
Another week, and yet another critical item in the press on the cost of obtaining corporate legal advice. And to be sure, it’s certainly a fairly open goal at... read more
11th of November 2014 by Warren Ryland
- Is crowdfunding the answer to your business's financing challenge?
As the credit crunch and ensuing recession of 2008 began to bite, lending to businesses dried up. To their shock, even long-established, profitable businesses... read more
2nd of September 2014 by Warren Ryland
- Complying with the Data Protection Act: 3 business bear-traps awaiting the unwary
Visit the website of the Information Commissioner’s Office, and there’s an interesting section entitled ‘Enforcement’. In it, the... read more
1st of September 2014 by Warren Ryland
- What might a Legal Audit reveal about your business?
When we start working with a business we assess their existing legal arrangements to determine how these can be improved and aligned with commercial objectives. We... read more
9th of July 2014 by Warren Ryland