What do you need to think about before signing a shareholders’ agreement?

We are all likely to need some help to achieve commercial success at some point. A proposed business project may require expertise which is outside your core business. Of course you will be able to master the skills required in the business by hiring or training, but how long will that take and at what cost?

You will be considering carrying out the single business venture with other business partners. Forming the business venture with others and signing a shareholders' agreement with different resources and/or expertise from yours may be an efficient way to start.

You will want to think about the following before you start.

Check the credentials of your prospective party

You should check the credentials of any prospective party as a standard business practice. You will also need to think about the creditworthiness of the business party in case things don't go as planned.

Think about the structure of the business venture

The business venture will be a legal entity which exists apart from your current business. We can advise you together with your tax advisers as to what structure will be best.

Agree on the contributions of each party

Each party is likely to make different contributions to the business venture. The shareholders' agreement should be clear on how much money each party is putting in. You should also address what will happen if that initial influx of money is not enough to carry the venture through to profit. What will happen if the business needs more money? Will the business seek outside investment or will the parties put in more money themselves? Also, if one party is the “money” party and another is the workhorse, it is good to make this clear on paper so that everyone understands what they are getting into.

Decide how profits, losses and liabilities will be shared

It is important for you to agree how profits and losses will be shared, although this will most likely depend on the contribution of each party—financial and otherwise. You should also agree how liabilities will be assigned.

How will the business venture make decisions?

You should talk about and decide how the business venture makes decisions. You will want to think about what are important topics. In many cases, you will want major decisions to be unanimous, so that any party has the power of veto. In others, you might want decisions to be made by a majority.

Agree on exit strategies before you start

No one ever wants to talk about this one, but it is extremely important to discuss this at the beginning of the business relationship. Decide now, whilst everyone is getting along, what will happen if one of the parties does not want to be involved anymore. Think ahead to a time when the parties may not be in agreement, which will not be the time to start arguing about exit strategies. The time to agree is at the beginning when everyone is working to make the business take shape.

Are you thinking about what you will need from a shareholders' agreement? 

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