The best time to finalise an agreement which relates to disputes, sale of the business, major capital expenditure, policy on the treatment of profits, decision-making, restraint of trade and many other issues is when the business is being formed, not months or years later when the same level of enthusiasm and friendship, that was there at the beginning of the business, may not be as evident.
Going into business with someone else is a big event, so the key reasons to have a co-ownership agreement is to have set the “rules” before you start playing. It’s important to consider setting the clear expectations of everyone involved as a partner, unitholder or shareholder right from the beginning.
Items to consider include:
- Is every partner, unitholder or shareholder required to work full-time in the business? (Called a principal)
- The principals should agree on the decision-making processes to be implemented within the business.
- Restraint of Trade – consideration should be given at the very beginning as to what would happen if one of the principals wanted to do “private work” or wanted to leave the business at some future date. There are various types of restraint of trade clauses and consideration should be given as to which type of restraint clauses should be included in the agreement.
- Working Capital Contributions – the agreement should summarise the founding principals’ intentions relative to the funding of working capital for the business:
- The founding principals need to determine a policy relative to the treatment of profits.
- Sale of equity to third parties – will there be a prohibition on any one selling their equity to a third party?
- What will be the rules that have been agreed to by all of the founders relative to a forced exit from the business?
- A formula for the methodology to be utilised for the calculation of an exit value held by a principal in the business.
- An agreement relative to a “Buy-Sell Agreement”. Consideration of wording and the formula to be utilised for the calculation of the exit value.
- Dispute resolution procedures relative to a dispute that cannot be agreed on from normal negotiations
- Consideration relating to the inclusion of a “drag-along rights” within the agreement. (A right that enables a majority shareholder to force minority shareholders to join in the sale of the company)
- Consideration relating to the inclusion of a “tag-along rights” within the agreement. (If the majority shareholder sells their stake the remaining minority shareholders have the right to join the deal and to sell their shares on the same terms and conditions as the majority shareholder).
Whilst it is preferable that a co-ownership agreement is negotiated at the beginning of an entity’s life, there is no reason that a co-ownership agreement cannot be agreed to at any time during an entity’s existence.
If you would like to have a discussion with us in regards to the creation of a co-ownership agreement or a shareholder’s agreement for your business entity, please do not hesitate to contact us.