- Business
- Getting Started
When you are starting out in business there are many responsibilities that demand your attention. One that may not seem important in the early days, especially if you get along well with your business partner, is a shareholder agreement. But that’s the ideal time to put one in place.
At a glance
- What happens when equal shareholders disagree, and how can a business move forward?
- Setting up a business with a 50:50 ownership may seem fair, but it can lead to complications down the line.
- Many businesses operate without a shareholder agreement, which can create significant challenges.
Nick Bayley, a business growth advisor at Elephants Child, has worked with businesses facing deadlock over the sale of the company because two equal shareholders can’t reach agreement.
From the start, you need to consider what happens if disputes arise over major decisions, especially if one decides they no longer want to be part of the business. Elephants Child has worked with businesses in such situations where one owner wants to retire, pursue new challenges, or simply falls out of love with the business and wants to do something completely different. Maybe one wants to expand and the other wants to maintain the status quo.
If you were to find yourself in a situation where you want to exit the business, but your equal shareholder doesn’t want you to, your options are limited.
In any of these scenarios, achieving a resolution can be difficult without a pre-existing agreement outlining how to navigate such deadlocks.
Any form of sale – whether partial or full – needs both shareholders to agree for it to proceed. One shareholder might consider walking away, but that could lead to considerable damage to the business. They could also end up forfeiting the financial reward they have worked so hard for.
Why shareholder agreements matter
Shareholder agreements are the most effective way to prevent these potential issues. Ideally, shareholder agreements should be put in place when a company is first formed and reviewed regularly. Agreements typically cover how the business will be run, decision-making processes, and arrangements for the sale of shares. Problems, as detailed above, often arise when friends or family go into business together and don't like the idea of putting formal arrangements in place. But they are for everyone's protection. If you can't agree on having an agreement in place, that's probably a sign that you do really need one.
It’s never too late to put an agreement in place, and always preferable to get one signed before a disagreement occurs. Equally, if you have an agreement but haven’t reviewed it for some time, it’s good to check what’s in place and if it still meets your needs.
As with many things relating to the sale or partial sale of a business, the sooner you act, the more options you will have. This will leave you in a better position for a smooth and profitable exit.
Need help with your shareholder agreement?
To help protect your business and your partnership by planning for the future, get in touch today.
We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James's Place. The services provided by these specialists are separate and distinct to the services carried out by St. James's Place and include advice on how to grow your business and prepare your business for sale and exit.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.
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