Business Succession series – 2. Going Into Business With Your Mates? You Should Read This
Whether you are a new start up or a well-established business, getting your business succession plan together could alleviate some serious future issues. Regardless of whether the proprietors of your business are your best mates, family or strangers, read below to understand more about the importance of business succession plans.
Do you know what your business succession plan is?
Why do problems occur?
Any businesses with multiple owners whether in a partnership, company or unit trust should have a succession plan to take into account life’s vagrancies such as death, total and permanent disability, retirement, sale of interest and expulsion from the business.
Many businesses fail to have a “full and frank discussion” during their “courtship” and usually think that the “honeymoon period” will last forever, and as you are doing this with friends it's easy to think nothing bad can come about. But like so many relationships, businesses also end up in “divorce”.
Without a properly structured succession plan including appropriate business proprietors agreements which are tailored to suit your particular business, you could spend much time, money and angst sorting out their “divorce”, which may not be satisfactory or, as in many cases, put undue pressure on you business so that it ultimately fails leaving both the departing and continuing business owners with a disastrous result
The following is a real example of a case our Business Team encountered;
Five long standing friends go into wine grape growing business which is conducted with some success for a decade, with no written succession plan. When one day Ray gives his mates 12 months notice that he wants to get out.
As there is no agreement he gets a valuation done of the vineyard.
The parties are pretty “laid back” as they are all mates and Ray is confident of a good valuation as they sell their grapes to the “big boys” for their cab sav.
There are no agreements for the sale of their grapes.
The wine industry goes into downturn and the grapes are not picked up by the big boys and to add to this, the valuation comes in, Ray’s not happy but worst still the 4 mates do not want to buy him out.
As a result of this there were major litigation issues, friendship lost and the exiting proprietor accepts 1/3 of valuation. To add to this the remaining proprietor’s business struggles as experience has cause continued conflict. The business is now under stress as bank calls up loans due to refinancing and poor valuation.
How can this be avoided?
All businesses or real estate property investments with multiple owners should have these discussions during the “courtship” and a succession plan be put into place with appropriate proprietors agreements. This may take some time to develop in conjunction with their accounting, legal, financial and other business advisors.
Once developed it should be reviewed annually in order to provide certainty for the business owner.
Moreover, lenders will require evidence that such agreements exist and are reviewed to give the lender further comfort that your clients know how to run their business.
Want to Learn More?
If you want to get in touch and learn more about how this might effect your business, please contact us and speak to our expert business law team today.
Written by RNG Lawyers Partner and commercial lawyer Adrian Riccioni