Going into Business with Family/Friends: Why a Shareholder Agreement is Essential!

Starting a business with family or friends may seem like a great idea. After all, you already have a strong relationship with these people, know and trust them implicitly. However, it's important to remember that businesses can be complex, personal circumstances can change, and people may have had different views on what each understood was the path/responsibilities. So when disagreements arise things can get very messy quickly with once-strong relationships damaged.

That's why it's important to have a carefully drafted shareholder agreement in place before starting your business. This agreement gets the foundations right. Helps you to have important discussions at the beginning. Makes sure you are all on the same path, by outlining the agreed business vision and the rights, obligations, and responsibilities of each shareholder, as well as how decisions are made and what happens in the event of a dispute.

What is a Shareholders’ Agreement?

A shareholder’s agreement is a binding contract between the shareholders of a company, governing the relationship between the shareholders and specifying the business of the company, who controls the company, and how the company will be owned and managed. It also outlines how the shareholders’ rights are protected and how they can exit the company if needed.

Here are just some of the things a properly drafted shareholders’ agreement should include:

·       Structure, management, and direction of the business

·       How responsibilities will be divided between the involved parties

·       How shareholders may acquire or dispose of shares

·       How the company will be funded – now and into the future

·       Who gets to make what decisions

·       What will happen if the relationship between shareholders ends or a dispute arises

·       What happens when you want to sell or you get an offer

At Advantage Partners Lawyers, we've seen firsthand how important a properly and carefully drafted Shareholder Agreement can be for family and friend-owned businesses. Here are a few reasons why:

1. Clarifies Roles and Responsibilities

A shareholder agreement outlines the roles and responsibilities of each shareholder in the business. This can help avoid confusion and disagreements down the road, as everyone knows what is expected of them.

2. Sets Out Decision-Making Procedures

A shareholder agreement sets out the procedures for making decisions within the business. This can help avoid disputes and ensure that everyone has a say in how the business is run.

3. Outlines What Happens in the Event of a Dispute

Unfortunately, disputes can arise in any business. A shareholder agreement outlines what happens in the event of a dispute, including how it will be resolved and what happens to the shares of any shareholders who decide to leave the business.

4. Protects the Business

A shareholder agreement can also protect the business from potential risks and liabilities. For example, it can include provisions that prevent shareholders from competing with the business or soliciting its customers.

Next Steps to Grow and Protect

So, while going into business with family or friends can be a great idea (and we love it when we see the successes that can come from this), it's important to protect yourself and your business with a carefully drafted Shareholder Agreement (A Deed of Indemnity to protect Directors from liability may also be something you want to look at).

An added plus of getting an experienced business lawyer involved is that you can get us to ask the questions that you may not be as comfortable asking or drilling down on when dealing with friends or family.

At Advantage Partners Lawyers, we specialise in this area and can help you draft an agreement that helps to set the foundations for a successful business, one that not only meets your needs and protects your interests, but helps to keep family and friend relationships strong and positive. We are here to help you maximise your business's potential and achieve your goals. Get in touch now for a Discovery Call on how we can help you.

Please note that this is a general and brief update, it does not purport to be comprehensive legal advice of all information and/or relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action with respect to this area.