Going into business with friends or family? - Has your business got a ‘pre-nup’ agreement?

We hear plenty about celebrity pre-nuptial agreements in the media. Whilst I’m not about to discuss the merits or otherwise of those, I do think there is plenty of merit in what could be called a business ‘pre-nup’. What I’m referring to is a shareholders’ agreement.

A shareholders’ agreement is an agreement between all or some of the members of a limited company. In such an agreement the shareholders can deal with issues which either aren’t covered by the articles of association of the company or by the law – primarily the Companies Act, - or they can vary what would otherwise be implied. The key point is that the shareholders can decide in advance how they want the company to be run and what should happen in certain situations.

You might think that a shareholders’ agreement isn’t necessary for friends or family members going into business together, but I couldn’t disagree more. I have heard of so many cases where former friends, colleagues and family members have gone into business together and don’t think they need an agreement because they are all in agreement about the business – until they aren’t!

To take the pre-nup analogy to its ultimate conclusion – when a corporate ‘divorce’ is looming because there is a major disagreement over something to do with the company, it’s so common to find that those people who were so sure that they all agreed in fact all have very different ideas about what should happen. If only they had treated going into business as exactly that rather than an extension of their friendship or family life, they might have been more objective about it.

Going into business requires a commercial approach. What each of the parties involved in the business venture needs to do is to identify their expectations and make sure they match those of the others. In some respects this is even more important when the business partners are already friends or related because there will be existing dynamics from that relationship which might adversely influence the business venture if not addressed right at the start. Unfortunately I tend to find that people in these situations can tend to be more reluctant to deal with the issue rather than more willing. The sad part about it is that when a dispute arises in such cases it can be all the more acrimonious. The result can be loss of previously longstanding friendships and bitter family feuds – not to mention the impact on the business.

Many disputes could be avoided by taking legal advice and drawing up a shareholders’ agreement. So my advice would be to take advice on the sorts of issues that might need to be addressed and have it documented in a shareholders’ agreement. Treat the business venture like a business and keep your friendships and family relationships intact!

Sue Mann

Commercial Solicitor, Birmingham