Looking back over the last 2-3 years, I can see now how much damage the lack of appropriate and adequate written (and enforceable!) agreements can make to groups of professionals carrying on their business or practice. Apart from costing clients a fortune financially, there is the emotional stress and legal fees that can be crippling.
Typically, when two or more professionals enter a business relationship, whether investment or medical practice, it will be structured so that the business is carried out:
- in a partnership
- in a unit trust
- in a company
or a combination of the above. Each stakeholder may be represented by either a family trust or the professional himself.
In the rush and excitement of assembling these business arrangements, it is probable that the need for a stakeholder’s agreement of some type, such as:
- a partnership agreement
- a shareholder’s agreement, or
- a unitholders agreement
is raised, but for whatever reasons they never seem to do not get done.
The most common problem in not having a clear and relevant agreement is when things go wrong or the arrangement needs to be terminated. Examples of more typical problems include:
- the business or investment underperforming original expectations
- conflict over management issues, e.g. staffing, practice direction
- perceptions of unequal financial or work effort contributions
- certain stakeholders being perceived to be “distracted by external issues”, not fitting in, or going through crisis such as domestic relationship problems, family or personal illness
The real problems created by lack of an appropriate stakeholder agreement include:
- how and when do you value the interest in the business or the investment that is potentially in dispute? Often the existing party believes his interest to be much more valuable than perceived by the remaining party
- if no agreement can be reached, there are no set provisions for arbitration or mediation. This means that legal resolution by a Court is the only remedy – very expensive and very time consuming
- minority interests can often be trampled on as there is:
- no exit mechanism or valuation process
- profits can be bled off from the business in a variety of methods
- the minority interest holder is likely to be offered much less than his percentage of the whole business would suggest
As the lyrics of popular songs often say “breaking up is hard to do”, I can confirm from my position as a business advisor to many professionals, that it is twice as expensive, emotionally painful and very time consuming if they (the optimistic professionals setting off on their new business venture) don’t get appropriate stakeholders agreements in place prior to commencing a new business venture. It gives options and processes at the end of commercial relationship that make any dissolution of a relationship much easier to handle by all parties. If you need some ideas, assistance or a “second opinion” on a tax or business issue or if you just want a free cup of coffee! – then do not hesitate to phone Bernard on 0419 045 908 or 08 9427 4944