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.

Due diligence

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 Ryland

 

 


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