Hundreds of new businesses start up every month and unfortunately hundreds of enterprises fail. Some fail because the product or service is ill conceived with no market for them and some because of poor financial management. Others fail because people’s motives and expectations in business change and it is this reason that creates a number of opportunities to slip up.
When you set up a business with a friend or associate there are exciting times ahead, the money is saved, the loan approved and you’ve just received the forms confirming your new shiny registered company name. You and your co shareholder and director celebrate and toast to the future success of your venture that you have spent much time planning and scoping out.
You have got product making skills and your co-director has great business development and inter personal skills so it’s a good match of business attributes and away you go. You get on with manufacturing, creating software and packaging knowledge whilst your other business half develops supplier pipelines, market presence and business relationships to generate orders for the product. During this set up phase the cash in your business is being used to meet your salary so you can pay your mortgage, put food on the table and pay the business overhead costs for materials, premises and the usual business rates.
It usually takes several months to get traction into a new business and start gaining the trust of your market before some cash flow starts to trickle in from orders. Your relationship with your co-director is under strain because you want to supply the product more quickly in greater volume and because the money is running out it’s getting stressful.
Fortunately the scales tip and orders start to flow in. You are busy at the ranch knocking the widgets together for suppliers and seeing some money start to come into the bank and you breath a sigh of relief because creditors are being kept at bay and the family finances are not under strain.
It’s important to have regular meetings with business partners but this often slips in these early stages. You set up a meeting with your co director about how you want to develop the business and agree on strategy for growth. To your surprise he wants to sell the business into one of your suppliers. You think that it is too soon given the orders are stacking up and that there are many other opportunities to grow independently. You fail to agree a strategy at this meeting and carry on without having agreed the way forward.
With no Shareholder Agreement in place to govern disagreements or spell out who has the right to vote on different business issues there is no recourse to address the disagreement. Unbeknown to you your co director has been talking to the businesses main supplier about his discontent about not being able to agree a business plan with you and he thinks a merger is the best way forward. He is offered a deal to join them that he cannot refuse to deliver your product in house for them with their own product developers. He jumps, taking the supplier with him and in the process the main supply line of orders. Loss of credibility to your business means the other smaller suppliers follow suit.
You are left with no business income and with the burden of pre acquired stock and product you cannot shift. You can’t afford a new business development manager because you have limited cash and now the creditors are knocking loud on the business door because they have not been paid. There is no recourse to your now ex co director because there is no service contract with him and your business and no Shareholder Agreement which would otherwise have prohibited this behaviour, put in place restrictive covenants and regulated voting rights in the business. This would at least have given you and he a reason to negotiate or point out if he carries out his threat you will be able to pursue significant damages for breach of contract or dishonest practices making him personally responsible for loss to your business and on going liabilities. An incentive for him to stay!
You skimped on important governance documents when setting up your company and just incorporated an off the shelf company. You and he thought it would be a pain and too expensive to put a Shareholder Agreement in place. Ironically the cost which you could have allocated to this was spent on the celebratory beers when you launched the business. None of the now irretrievable fall out with your business partner was envisaged in the times of friendship and optimism for the future. You have to liquidate the company and having eaten away at your own personal money after your business partner’s departure you have nothing left whilst your ‘ex’ sips from the flute of success without so much as a glance back at you.
Depressing? it’s a realistic scenario and whilst differences of opinion and disagreements cannot be avoided in business, the outcome of them can and should be managed by common sense engagement with basic business governance agreements at the outset.
If you’re in business you’re saying you are an entrepreneur so ignorance of the future is no excuse for failing to act like an entrepreneur at the outset. Protect yourself, your family, your business time and value and simply put, the avoidance of catastrophic financial and business failure need not come at a significant price. In fact fixed fees and online or telephone legal services mean the cost is known at the outset and half an hour of your time would be all it takes to complete vital paperwork. A small investment now will pay dividends.