The value and importance of a business prenup!

Like entering into a marriage, every new business is hopefully an exciting prospect, entered into with a view to a fulfilling and financially rewarding future.

You may decide to go into business on your own or with a business partner. In both cases you will consider whether to incorporate as a Limited Company and how to structure your shareholding, opt for a Limited Liability Partnership, or to simply trade as a self-employed individual. You will look into business bank accounts, decide on accounting software or find an affordable accountant. You might decide you need to register with the Information Commissioners Office if you are likely to be handling personal information about individuals.

In many cases with so much to think about when you start out, those starting up for the first time will not have a view to the mechanics of how to manage the future of the business. Such scenarios as selling the assets and good will of the business, illness or death or falling out with a business partner are far removed from your mind. At this stage all seems good.

Many small businesses are made up of husband and wife, siblings or best friend teams who decide to split everything 50/50 which is great until it comes to a parting of the ways. Too many small businesses fail to consider getting anything in writing that will work as a legal and binding guideline for those unforeseen or unwanted circumstances or divorce. The value of a properly drafted shareholder agreement or partnership agreement therefore cannot be under-estimated.

Scenarios that I have come across include: a husband and wife with no written agreement wanting to go their separate ways. The husband wanted to keep the business but she wanted her 50% out of it so he was forced to close the business as he could not sustain it without her share.

Two brothers would simply not compromise on which one would continue to run their jointly owned Company. The High Court was therefore forced to wind up a lucrative business and neither brother got anything at the end of the day.

Two companies working with an oral joint venture agreement fell out when one was disappointed with the level of return on the venture in the first year. Strangely enough each party had a different recollection of the original agreement. The matter is still going through the courts.

By contrast I have worked with businesses that see the point in covering all bases in a legal shareholder or partnership agreement. This can be the result of sitting down together and making sure everyone is on the same page and that the members and business are protected going forwards.

My advice is therefore to think smart and plan for the future and record any agreements in writing.

Caroline Buchan
Barrister & Company Secretary
Chambers of Miss C Buchan
Tel: 01444 482222
http://www.carolinebuchanbarrister.co.uk
http://www.mediatingworks.co.uk

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Caroline Buchan
Barrister & Company Secretary