How to Avoid Disputes between Business Owners

Business partnerships have many advantages as they allow entrepreneurs to pool complementary skill sets and share startup costs and risks with one another.

Most businesses today have more than one owner. Unfortunately, many of the advantages of partnerships can also be disadvantages, and statistics show that up to 70% of business partnerships ultimately fail. 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.

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:

• A major distraction from business operations;

• Damage to customer relationships and business brand;

• Significant personal stress (that affects family);

• A forced buyout of an owner;

• Or end 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.

Clear Strategies

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 consider the following:

• Clarify roles and responsibilities! One of the most frustrating things is not knowing what everybody else around them does. Modern organisations are very complex and have a high level of inter-dependency between departments and team members. For a business to run smoothly, employees must be aware of who does what in the organisation including the top management -directors' responsibilities. Ensure that each director understand their own responsibilities and what is involved in the other director’s duties. As the company grows, it becomes more important to list in details the roles and responsibilities of each department, manager, and employee. (tip: A systematised list of job roles creates a culture of order and prevents work duplication by different people.)

• Get alignment right! This means making sure that all of the owners and their under employees within a company are geared towards achieving common goals, and it also means that each owner understands what other owner is after and make sure they are consistent. Strategic execution can fail simply because the work the business is doing does not align with their strategy. It goes without saying that alignment relies upon collaboration and effective communication.

• Think of ‘what if’s? 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.

Prepare Legal Documents

Once the strategies are considered, the owners should document their decisions in binding legal documents to govern how to deal with the mitigating risks (in other words, worst-case scenarios). As a golden rule outset, we recommend having:

• A Shareholder Agreement or Partnership Agreement. Both govern the owners roles, rights, responsibilities, obligations and liabilities to the business. (Note: In a legal context, a Partnership Agreement and a Shareholders Agreement are used for different legal structures. A Partnership Agreement refers to an agreement between partners of a partnership. A Shareholders Agreement refers to an agreement between the shareholders of a company. The key difference between a partnership and a company is that a company is a separate legal entity. The major implication of this is that partners of a partnership are jointly and severally liable for the debts of a partnership whereas for a company, a shareholder’s liability for the company’s debts is usually limited).

• A Loan Agreement. In case 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).

• A Business Exit Deed (Note: this can be also included 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 hope this article provided some tips on aligning business owners to work cooperatively to grow the business and avoid disputes.