Top 100 Tips for Business – #5 Relationships

25-04-2017

There’s a well-known saying from the Bible that ‘the love of money is the root of all evil’.

Well, when it comes to business relationships, it really is true.

This is probably the biggest issue we deal with when it comes to commercial law, and the single most important thing to get right.

No matter how close you think you are to friends or relatives, going into business together moves such relationships into a whole new dimension.

In our experience, most people discover different aspects of each other’s personalities. Couple this unexpected element with the stresses and strains of day-to-day life in business and you have a recipe for potential disaster.

Or you do if you haven’t put your new-style relationship on a firm footing from the start, by defining some rules of engagement.

Many people who are close and decide to set up a company, shy away from drawing up a formal contract for their relationship. Just as pre-nuptual agreements are notorious romance-killers, friends, relatives and even couples can feel concerned that bringing in a solicitor to formalise the way they deal with each other at work is a sign of fundamental distrust.

However, it’s absolutely essential for anyone who really cherishes the relationship they have with a would-be business partner. And those few words, drafted in black and white before emotion creeps in, can make or break what you have when things get tough. A legally drafted contract can provide you with a fall-back position, and if nothing else will guide how you make your decisions, particularly when a dispute arises.

Issues we see

  • Concerns about fairness arise a lot. These crop up when one side of a business partnership feels they are putting more in, or that their counterpart is taking more out than they are
  • Day-to-day decision making is another major one. I.e. who has responsibility for what, and in what situations one partner should refer to the other.
  • Ironically, perhaps, dispute resolution is something you really need to plan for before a disagreement occurs. Having a blueprint for who has the deciding vote when you can’t agree, or which external party you will refer the ultimate decision to, can save a lot of heartache when you just can’t resolve it between yourselves.
  • Death & divorce. Again, no-one really wants to talk about either of these, but they can break a business unless you lay down in advance, what would happen if one partner dies or there is a divorce among the business protagonists. What if a partner dies and their shares go to their spouse who knows nothing about the business or what it does? Or, what if a partner divorces and the business becomes part of a financial dispute? You can protect against these things, but it is vitally important that you build in the answers to them from the beginning.

5 essential steps for any business partnership

  1. Make sure each side of a party with a shareholding understands what it means, and what profit or income they can expect to take from the business.
  2. Ensure you have clearly defined responsibilities and decision making roles within the business, including who has the casting vote in the event of a disagreement – and what third party you will refer to if you really can’t resolve it.
  3. Troubleshoot things with a lawyer who will consider all possibilities and challenge you to consider all possible scenarios and protect yourself accordingly.
  4. Make sure that everyone involved is clear about your business plan, your hopes and aspirations for the business, who you are serving and how fast you want to grow, so that you are on the same page right from the start. Specialist commercial solicitors like the James Legal team will look at this full picture and help to guide your strategic business thinking too.
  5. Make sure that the partnership agreements you draw up dovetail appropriately with your other documents, such as your client service agreements and your various terms and conditions. This will ensure that everyone from your customers to your employees is also clear on the different partners’ role in your business.

Well, if you were in any doubt about the importance of thinking ahead and getting official when it comes to the relationships that gel your business together, we hope this has given you some useful food for thought.

A lot of businesses focus on the obvious necessities such as appointing an accountant, but fail to realise how important the legal things are too, until it’s too late. It makes us very sad when this happens, because litigation is so much more expensive than getting it right first time. Compare the £2,000 average daily cost of fighting a case in court, with the £8-900 it costs to draw up an agreement up front, ensure complete transparency and avoid any ambiguity.

Top tip

Don’t DIY it!

We’re too often approached by businesses that have fallen foul of using apparently cheap ‘off the shelf’ contracts, too. Because one size really doesn’t fit all – for example, a contract that is right for a construction company wouldn’t cover aspects like data protection that a web design agency needs. And a ‘bog standard’ document is unlikely to cover jurisdictions for an internationally trading business. It is really important to have something properly drawn up that is specific to the needs of your industry, and your particular business.

Avoiding the temptations to ‘DIY’ your legals is one of our fundamental rules of thumb when it comes to business law – read more about our reasons why in this recent blog.

If you have a business issue or just need some advice on getting all your cards lined up, why not give me a call on 01482 974 513, or email me at byron.swarbrick@jameslegal.co.uk

Check out our James Legal – The Business 2017 campaign, for more useful insights from James Legal and our expert partners; access to free business master classes and the chance to win one of two prizes together worth more than £30,000.


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