01
February
2015

The importance of a Business agreement

The risks of operating on a handshake agreement.

An alarming statistic is that as few of 4% of businesses currently have a documented agreement between the owners, this is true over all business structures whether they be company, partnerships or a unit trust.

The question that must be asked is why? It seems that although apathy and cost seem to be barriers, the overwhelming reason is that most don’t think they will need the document and the business operates on a handshake agreement with a common understanding of doing the right thing by each other.

Even with the best intentions this option is extremely naïve and ignores many important issues. Most people feel the document exists to solve disputes, which is true, but this is a small yet important part of the agreement, there are so many other aspects that business owners should agree and document before they occur.

An important part of the business agreement revolves around exiting the business, whether it be planned or unplanned. At some point one or more owners would like to exit the business or are forced to exit due to death or disablement.  It is important to agree what happens when these events occur. Under what conditions can an owner/s exit? Are there restrictions/time frames? Does the departing owner have to sell to the existing owners? How is the value determined? How will it be financed? What happens if the remaining partners don’t want to buy?

These questions plus many more can be agreed upon, a process in place that is fair to all parties that enables all to profit from the business in the long term.

An unplanned exit by way of death or disablement can be disastrous for the business, and unfortunately I have witnessed this first hand. If one of the owners is no longer part of the business, will the business be able to function? If not, what actions need to be taken? The estate of the deceased partner is entitled to their share of the business, how do the surviving partners deal with this? Do they buy the share from the estate? How is it funded?

Often unplanned exits such as above use a buy/sell agreement and an insurance policy to cover owners and key people that will ensure the business can carry on in the event of death or disablement of a key person whilst ensuring the deceased estate will not be disadvantaged.

Another area where issues often arise is around the sale of a business to an external party, what happens if an offer is tabled and owners can’t agree whether to accept? Conditions around bringing in a new partner (owner) need to be outlined. Businesses often bring in new owners often for a succession plan or perhaps to add another string to the businesses arm, so agreeing how this is to be achieved can play a crucial role in the businesses growth or long term sustainability.

The moral of the story is that we all enter business to make money and build an asset, a business agreement protects the value of the business and future income, it protects the owners and their families, and furthermore it can be a blueprint to handle growth and should form part of any businesses policy and procedures.

I couldn’t be more emphatic, if you don’t have a business agreement, yet work in partnership with others in any structure, you need a document. If your business is a partnership, your need a partnership agreement; A company requires a shareholders agreement and a unit trust requires a unit holders agreement. A solicitor and financial planner normally work together to provide advice in this area, if you do not have the necessary agreement contact either your planner or solicitor to arrange immediately.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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