How to avoid costly misunderstandings as a co-owner of a business

In particular, the following sorts of questions need to be addressed…

• What happens if one of the co-owners dies? Should the company be sold?
• Would the surviving co-owner(s) buy out their interest and, if so, how will that be funded?
• What would the price be? Market value or a pre-agreed price?
• Does life insurance need to be taken out both to provide for the company and to ensure that the business can continue to function (ie, key man insurance) and perhaps separately to enable the surviving co-owner(s) to buy out the interest of the deceased?
• What happens when an owner-manager is ill and cannot continue to work (and does there need to be private health insurance or critical illness insurance)?
• When should the business be sold?
• What happens when one of the owner-managers wants to retire? Does the continuing owner buy him out and again, at what price?
• What rules should there be about bringing family members into the business?
• Should there be a dividend policy? In what circumstances should a dividend be paid?
• At what point should a management team be brought in? And how would they be remunerated and incentivised?
   

It is crucial to the success of the business that there is a common understanding on these issues. Without this there will be all sorts of risks of misunderstandings and confusion over how to deal with these issues should they arise in practice, and with the potential fall-outs.

That common understanding needs to be set out somewhere and this is often done through the Articles of Association combined with a Shareholders’ Agreement, if a company, or through a Partnership Agreement, if that structure is used. The business and the individuals can then put in place any financial planning needed to ensure that the understanding can be implemented.

As ever, a bit of careful planning up front can avoid a lot of problems in the future.