Partner, Shareholder and Unitholder Agreements
Operating as a business partnership, combining shared skills, effort, contacts, finances and experience can provide great opportunities for business. The flip-side is that operators do not always agree and conflict can occur.
To preserve a working and business relationship a partnership or shareholders’ agreement provides a constructive framework to avoid or deal with conflict in an effective manner.
Ideally an agreement is set up at the beginning of a partnership or at a time when the business relationship is positive. Working with a partnership agreement, all parties understand how they plan to work together and strategies are in place which consider the mutual benefit of the business and all partners involved.
- Invest the time and resources to get your partnership agreement right.
- Create an agreement that all parties understand before signing, dating and storing on file.
- Review your agreement on a periodic basis to ensure it remains relevant.
Points to consider in formulating your Agreement:
- What is your business plan and long term strategy to manage for cash, growth or sale?
- Accountant for the business – what role will they play? End of year tax and compliance, quarterly BAS, management reports, trusted advisor and sounding board?
- Banking – which bank? sole or dual payment authorization? what is your approach to managing cash? will you access funding via debt or equity? what is your proposed level of debt?
- Business structure – partnership, company, use of discretionary or unit trusts?
- Business valuations when required – who? how? An external valuer or based on an agreed formula? Would an internal sale have a discount for avoiding broker fees?
- Buy in / buy out agreements – rights of first refusal, options to force sale if rights of refusal are not exercised. Drag along/tag along rights on business sale in whole or part
- Conditions for forced exit or retirement
- Decision making – delegated authority, strategic vs operational decisions
- Dispute resolution
- Dividend / drawings policy
- Employment policies – employee vs. contractor, super, parental leave, hours, employing family members, etc
- Ethical boundaries – tax obligations; employment law; environmental; customers
- Guarantees to banks, landlords, suppliers – what are the expectations? Do you have an agreed limit or balancing arrangement?
- Insurance cover such as key man, salary continuance, trauma
- Lawyer for the business
- New partners / shareholders – what is the review, vetting and approval process?
- Non-compete clauses – agreed boundaries by business type, geography, requirement to focus on the joint business or flexibility to work elsewhere
- Personal use or supply to friends and family – market price, discount, mates’ rates, free?
- Risk identification and tolerance for risk
- Succession planning and employment of family members; are binding agreements required with spouses to ensure the business risk from separation is mitigated?
- Time-frame for review and update of the agreement
- Wages / compensation for owner input into the business, who controls disbursement of profits, how often and how much?
The legal issues for Partners, Shareholders and Unitholders are technically different, however many areas overlap and our recommendation to enter an Agreement applies for all.
We recommend you describe and document your understanding for relevant issues to be covered in your Agreement. This provides clarity on how you intend to work and when you have done the ground work you will derive more value from a discussion with your accountant and lawyer. We have provided a brief example below:
| Issue | Agreement |
| Wages | Partner A to be paid $x per hour / per week for work in the business Partner B to be paid $x per hour / per week for work in the business Recognition of referral of customers above $x in revenue / profit to be recognized by a finders fee of $x Annual leave to be limited to x weeks per year. Significant holiday periods requiring ownership cover to be agreed Unless otherwise required, roles, workloads and pay rate to be reviewed every six months on 1 April and 1 October |
| Dispute | In the event of dispute the parties will first meet together to discuss. If agreement can’t be reached, each party will document their issues in writing before meeting again. If this is unsuccessful then the parties will seek an independent party to mediate. If the parties can’t agree a mediator then they will consult with Porters to nominate an independent mediator. The parties will not take legal action before all the above steps have been followed in good faith. |
| Business sale | If one of the business partners wish to leave the business then an independent valuation will be arranged and the remaining partner will be given 3 months to review and make an offer to the departing party at 90% of the independent value. Payment to the departing party can be made in equal monthly instalments over a 24 month period. |
| Expenditure | Any expenditure or commitment greater than $x must first be discussed and agreed with the other partners |
There are online options for agreements however in using a cheaper product than a customised agreement prepared by a commercial lawyer you risk missing issues and creating room for ambiguity and conflict.