Profitology

Category: Succession Planning

  • Set the Rules of the Game Before you Start: What to include in a Shareholders’​ Agreement

    Set the Rules of the Game Before you Start: What to include in a Shareholders’​ Agreement

    You’ve come up with an exciting business idea, you’ve formed a relationship with a business partner. You’re looking forward to launching your business.

    Whilst all partners are on favourable terms, all is rosy, now is the time to set the rules of the game.

    A shareholders’ agreement is used to outline the business practices, matters to consider in the event there are disagreements or unfortunate circumstances arise. It is the prenuptial before your wedding vows in the business world.

    What do you include in a Shareholders’ Agreement?

    Below are some matters to consider when drafting a shareholders’ agreement with your business partner(s):

    1.     Those decisions which can be made by one individual partner

    2.     The maximum dollar amount to be spent without consent from the other partner(s).

    3.     Decisions which require a majority vote, or a greater than a certain percentage in favour vote.  75% vote for example

    4.     The roles and responsibilities of each partner

    5.     What happens if one partner wishes to exit the business. Consideration can also be given where ownership is not equal and one party has a controlling vote to ensure he best interest of all parties is taken in to account. This is known as Drag Alongs & Tag Alongs

    6.     What happens if one partner dies or is no longer able to work in the business

    7.     A dividend policy for payment of profits

    8.     The nature of the business and process for changing the overall purpose of the business

    9.     How directors will be appointed and removed

    10.  Requirements for personal fund contributions, eg how much each party will contribute, in which circumstances additional funds can be called upon to inject in to the company. How the funds will be treated. Eg as a loan, equity, or a gift

    11.  The process if there is a deadlock or dispute between the partners

    Once you have this agreement in place you can focus on building your business, with comfort that there are mechanisms in place to manage unforeseen circumstances and that you have agreed upon the expected outcomes and profit share of the business.

  • Is your business attractive?

    Is your business attractive?

    You may not have immediate plans to retire or sell your business, but is it on the cards in the next 5 or 10 years? The key to setting any goals is to “begin with the end in mind” and it is no different when planning your exit from the business.

    There are a number of ways to exit your business. Your exit strategy may vary depending on the needs of the owners, the industry type and the potential buyers. Following are the common exit methods or strategies:

    • Close the doors and walk away
    • Hand the business to a family member
    • Sell to a staff member or business partner
    • Sell to the public
    • Merge with a competitor
    • Market to a multi-national

    When planning your exit from the business you need to take into account the following factors:

    • How much you need to retire – ie what sale price do you need to sell your business to retire comfortably?
    • What are your plans when you exit the business?
    • Do you wish to maintain a minor role in the business and ease into retirement?
    • Do the new owners need you for an extended period of time to maintain business relationships & pass on vital knowledge?
    • What are the tax implications of exiting the business?
    • How easy is it for a new owner to operate your business?
    • Are there any potential successors, willing and able to take over the business?

    Unless you plan on exiting your business by closing the doors and walking away, you are most likely trying to maximise the sale proceeds from your exit. This involves undertaking measures to increase the value of your business. Below are methods you can implement to improve the value of your business:

    • Improve the profile of your brand by publishing articles, sponsoring events, running workshops or attending networking functions.
    • Encourage your team of staff to embrace the business policies, the vision and empower them to act on behalf of the business without the need to defer to you to make every decision.
    • Create sources of revenue which are contract based, such as monthly maintenance terms or annual subscription fees, to provide more confidence in the generation of future income as opposed to one-off sales on an ad-hoc basis.
    • Develop a customer database of names and contact details which can be used for marketing campaigns.

    Employing the above strategies will not only assist with improving the value of your business on exit, but will also assist with increasing the performance of your business. In addition, your return on investment will be enhanced during your final years of trading.