Partnership agreements

Shareholders’ agreements: protection from loss or unnecessary expense?

28th  Oct 2013

Setting up a new business can be a costly endeavour. Between the new website, marketing and the expense of looking for new customers, many businesses do not consider risk management as a priority from the outset. The introduction of a contract such as a shareholders’ agreement is often put on the back burner and the function and profitability of the business become the main priority. The forming of such agreements can be seen as time consuming and costly but actually this business expense can save the company money in the long run and can creates a foundation and ultimately an incentive for all shareholders and directors to work together.

A shareholders’ agreement is put in place not only to resolve shareholder issues, but to resolve them quickly and quietly, keeping the business’ reputation and income intact. It can govern the actions of each shareholder and consequently the directors of a company, as the people who form small businesses tend to occupy both roles. It is a valuable mechanism in situations of shareholder disagreements or removals. It may prevent an ex-director providing the same services while attempting to poach the previous company’s customers. This would essentially save the company from spending both time and money on unnecessary court proceedings. A further attractive characteristic of a shareholders’ agreement is that it is not in the public domain. Therefore, any boardroom disagreement can be kept quiet to preserve the company’s reputation.

An article from the Independent newspaper, explains the benefit of using a shareholders’ agreement and how the alternative involving court action is much more expensive than putting a shareholders’ agreement in place, “In any event court action is usually expensive and time consuming and may damage the company’s reputation and the goodwill of the business. It is therefore important that there is a contractual procedure in place to resolve any deadlock as quickly and as privately as possible.”

It makes sense putting a shareholders’ agreement in place from the beginning to cater for changes in the shareholders’ interest and business direction. Consequently, the implementation of such a contract would be much trickier after the shareholder changes focus.  Resolutions to such situations are more time consuming and generally uncomfortable as the negotiations take place under a cloud of changing priority and frustration.

The article continues, “the directors and shareholders’ personal plans and expectations may diverge over time, making it harder to agree the terms of the shareholders’ agreement later on in the lifecycle of the company.”  So, putting a shareholders’ agreement in place may also result in a business being more profitable. The agreement can also regulate the everyday functions of the business, allowing decisions to be made quickly and fairly, taking account of the views of each shareholder. It can also regulate the responsibilities and remuneration of each shareholder, which could potentially prevent many misunderstandings and disagreements.

David Reilly, Director at Create Ts and Cs commented, “We believe a shareholder agreement is not only a mechanism for solving problems within a limited company and promoting the sustainability of the company but it’s also a way of managing governance in the business; reflecting the particular culture of the business.  Managing the consent issues and the shared responsibilities of each shareholder/director (in most small businesses the directors and shareholders are the same person); this way responsibility is allocated and incentive built into the agreement to ensure that each director/shareholder (small business model) is part of something that is theirs’ to grow as a team.  This is best done through a tailored agreement, which is a shareholder agreement that is first discussed with the shareholders/directors and the key issues agreed beforehand and then reflected in a tailored contract.”

Yes, it is a relatively costly instrument and is not always utilised. However, this does not take away from the fact that these agreements are an essential tool for your business. It should be common practice for these agreements are formed at the start of the venture alongside forming a company.

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Tougher Partnership Rules Could Increase Liability Risk

Legal experts are calling for a change in the law to make it easier to prosecute partnerships and individuals for criminal offences, even after the business has been dissolved and no longer officially exists.

Under current legislation, a partnership which has been dissolved no longer has any legal existence and cannot be called to account to for any allegations of wrongdoing.

The High Court has recently produced a Discussion Paper on Criminal Liability of Partnerships in which the Scottish Law Commission considers ways of preventing the prosecution of a partnership from being frustrated by its dissolution. It also examines the circumstances in which individual partners may be held criminally liable for offences committed by a partnership and asks whether legislation should be introduced to make it easier to prosecute partners as individuals.

“Where there is evidence that a partnership has committed an offence, it should be possible to prosecute that partnership, and make the partners liable for any fines,” said Patrick Layden QC TD, the lead Commissioner on the project.

“A partnership and its partners should not be able to avoid liability just by being dissolved. Our Discussion Paper explores ways to prevent this. We also consider whether it should be made easier to prosecute individual partners for offences committed by the partnership, providing an added incentive for partners to ensure that their partnerships comply with the law.”

However, even under existing legislation, many partners can find themselves embroiled in problems long after their business has ceased to exist unless the proper procedures have been followed, warns David Reilly, commercial director of Create Ts and Cs, which specialises in tailor-made commercial contracts for SMEs.

“Dissolving a partnership can already appear complicated to businesses and any new changes to the legislation must be communicated with this in mind,” said Mr Reilly.

“It not uncommon for some companies to move from being limited companies to partnerships, then back to limited company or a sole trader.

“Some business people have a tendency to go on a journey which leaves a complex legal legacy behind them especially if they don’t dissolve partnerships as they move.”

“Failing to dissolve partnership is a bit like business bigamy. Most people entering a second marriage will make sure they have been divorced first, but not all companies operate so tidily,” said Mr Reilly.

“If a partnership is not resolved it can cause problems with a lot of issues including liability, intellectual property and the relationship with suppliers.

“If there is any intellectual property created within the partnership it will require the partnership being dissolved and the intellectual property being transferred to the next business entity in order for people to use that IP in the next business venture.”

The Commission has called for the views of interested organisations and members of the public by to be submitted for consultation before 12 August so that it’s final report can be published later in the year.

Websites Suffering Under-Investment as Designers Face Tough Competition

 

by EasyEditor Newswire                                                                                                                                                             16/12/2010

Web designers across the UK are routinely over servicing and under charging clients in a bid to keep the e-commerce revolution on track, claim experts.
While 72% of website designers have seen a rise in expectations from their SME clients the majority are struggling to maintain increasingly sophisticated sites on lower budgets and against cut-price competitors.
According to web hosting provider Fasthosts at least a third of web professionals have provided clients with out-of-hours overtime and half have performed work free of charge in a bid to demonstrate the benefits of a properly designed and maintained website.
In the last two years at least 60% of web design firms have been forced to slash their hourly rates while 56% admit to losing clients to cut-price competitors. Many have also had to deal with projects being changed half-way through or work added because client’s under-estimate the maintenance required for a good website.
“For many small firms, using external web professionals is a very sensible and rewarding option,” said Steve Holford, marketing director of Fasthosts Internet Ltd which conducted the research and found low technical understanding from clients was hindering the success of many web projects.
“It’s clear that in recent years, web designers have worked hard to adapt to the needs of clients and demonstrate the value they can deliver. With the right approach from both small businesses and the web design community, online revenues can be successfully built and so help the UK economy in its return to growth.”
However, with many web design firms feeling the pinch as a result of over servicing and under payment leading business experts have urged a review of how client expectations are managed at the outset.
“Having a bespoke set of Terms and Conditions can help manage customer expectations and encourage smooth client cooperation to ensure projects stay on track and web companies to manage cashflow,” said David Reilly, Managing Director of Create Ts &Cs. “A lack of relevant terms and conditions often leads to longer projects, lack of payment and scope creep resulting in the client taking advantage and in some cases retrospective price discounting.
“A set of properly written terms and conditions places the supplier in a position of strength allowing negotiations to start from a sensible position and reach a conclusion both parties can be happy with.
“E-commerce is now big business, worth billions of pounds a year to the UK economy. If British businesses are to compete on the world wide web they have to be prepared to invest in the technology to attract consumers. For their part, web designers have to set out the value and benefits of what they can do in unambiguous terms.”

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Firms Urged to Impose Penalties for Late Payments

by EasyEditor Newswire

 

Contracts between firms which include late payment clauses need to become a common feature of everyday business practice, claim legal experts ahead of an EU update of a directive aimed at tackling business failures.

On average, the majority of small and medium firms have to wait at least

41 days longer than the time scale for payment agreed with customers before they get their money.

The latest research from Bacs Payment Schemes found that in the current economic climate at least 37 per cent of late payers take up to three months to settle invoices, leaving small and medium enterprises (SMEs) out of pocket to the tune of over £24billion at any one time.

According to the Law Society the growing trend means businesses will have to include late payment clauses in contracts as standard if the number of firms going out of business due to cash flow difficulties is to be reduced.

“Average commercial debts caused by late payments are high in the UK, and for SMEs a lack of cash flow can be crippling. With credit less available to those businesses from banks, late payments have a far more serious consequence for SMEs,” said Robert Heslett, President of the Law Society in England and Wales.

“Considering the amount of red tape SMEs and start-ups are faced with, it is no surprise that seeking protection against late payment from customers does not come top of the to-do list. However, it could be the difference between the business surviving or not, especially in the uncertain economic climate.”

As the imminent increase in VAT to 20 per cent is expected to add to SME cash flow problems legal and business experts claim firms must take advantage of the protections already available to help them safeguard against late payments.

“Carefully worded terms and conditions can set out in clear terms how and when payments should be made with penalty clauses if a deadline is missed,” said David Reilly, commercial director of Create Ts and Cs, which specialises in tailor made terms and conditions for SMEs.

“Ts and Cs do not need to be complicated as they are intended to simply represent the formality of a business relationship.

“Properly prepared terms act as an effective deterrent for late payment and, should there be a dispute, can help solve a problem without the need for drawn-out legal action. However, if a firm needs to go to court to recover a debt it is more likely to succeed if it can be shown the debtor is in breach of an unambiguous agreement.”

The European Union is currently looking at updating a directive aimed at tackling late payments, such is the impact on the SME sector across Europe as a whole, but any resulting legislation is likely to take some time before it comes into force.

According to the Federation of Small Businesses, which represents more than 213,000 members across the UK, many government departments and agencies are still paying late despite making commitments at the start of the recession to settle invoices within 10 days.

A survey of SME cash flow found that on average 34 per cent of payments from the private sector are late compared to 31 per cent of UK central Government receipts, 30 per cent of those from Government agencies, 30 per cent from EU institutions, 29 per cent of NHS money and

25 per cent of local authority payments.

Formality and Informality in Business – Getting the balance right!

By David Reilly, Founder and Commercial Director of Create Ts and Cs                           17/04/2010

As a business owner, getting paid for the work I do is an important part of building or growing the business .  We all know cashflow is ‘king’.

With that in mind, let me establish context for the following;  this blog was inspired by a number of recent visits to the sheriff court combined with observation and personal experience.  The subject matter – which is also a talk I’ve delivered at various events across the central belt of Scotland – positions the idea that an absence of formality within business is more likely to lead to dispute, for example ‘non payment’ compared to business relationships supported by a contract or written Terms and Conditions.

So, what do I mean by Formality and Informality; formality is the presence of a contract, or progression of a business relationship from prospect to customer by way of a written agreement.  The word ‘contract’ implies Terms and Conditions of sale or bespoke contracts written to formalise the business relationship, communicating for example how the business is to be paid or how the business’s IP (intellectual property) is to be treated.  Informality on the other hand, in this instance describes an ‘absence of contract’.  Interestingly, the majority of small claims cases I’d witnessed and the overwhelming number of disputes I encounter on a weekly basis have a common theme, the business engages and transacts with another business ‘without’ the presence of a contract.

On the face of it, informality is an attractive exchange, no paperwork is required, there’s a perception of ‘getting on with the business of doing business’, a no nonsense approach and a chance for you to communicate your ability to be ‘flexible’ to your new client.

When disputes occur, particularly disputes that involve ‘non payment’ it seems the SME sized client tend to emotionally react and can take ‘non payment’ more personally than a larger organisation.  This can result in an emotionally charged dispute, as the individual feels ‘let down’ and ‘disappointed’ as a result of their unpaid efforts.

It’s clear that if you fail to Pay BT or a similar sized organisation, a process unfolds, initially involving letters and reminders, finally ending in termination of services and possible court action.  With departments dedicated to such activities and armies of staff ready to pounce, large companies are geared up for these eventualities.

So, when the individuals or directors of SME businesses reach court, generally within the Small Claims process; a natural clash of jargon ensues!  The law is interested in ‘points of law’, or what business contract exists.  The presence of a legal document or contract can help avoid unnecessary disputes in the first place and assist to communicate within the legal system which requires relevant legal criteria.  The legal system can appear alien to businesses who fail to communicate appropriate legal based arguments.  It’s not about right or wrong, it’s about ‘points of law’.

Arguably the use of contracts to encourage agreement between two companies prior to ‘doing businesses’ is an opportunity to create an environment in order to build trust between two companies, laying the path for future business and increasing the likelihood of success.  Why allocate that much trust to a business or an individual with whom you’ve never done business before!  Perhaps informality or the demonstration of the businesses to be flexible should be delivered after a contract is signed? We all like to over deliver for our clients, perhaps we should attempt to protect ourselves and the business first to ensure everybody gets what they want for the experience before we ‘over deliver’.   Maybe, part of the issue regards a businesses fear of requesting a contract reflects our own perceived value of our business.  If we believe we do a good job and can deliver a quality product or service, is it only reasonable to request formality or a contract from a potential customer before we deliver our services.

Minimise business risk – employ effective Ts and Cs – Getting Paid!

An article picked up and presented on various social media networks published by Flag Media News & Features  news@flagmedia.co.uk, written by Sean Murphy, Flag Media.  December 2009.

 

A lack of properly written terms and conditions can make the difference between failure and survival for thousands of businesses struggling with cash flow, claim business experts.
Recent figures from Bacs Payment Schemes Limited (Bacs) revealed that more than a million SMEs are owed over £30.4 billion in late payments, a rise of over £11 billion in the last 24 months.
Cash flow, always the single biggest problem facing any small to medium sized enterprise (SME), is now tighter than ever and experts have warned that failure to have specific terms and conditions can help or leave firms seriously out of pocket if a deal goes bad.
“Terms and conditions simply represent the formality of business relationships,” said David Reilly, commercial director of Create Ts and Cs, a company specialising in tailor made fixed-price terms and conditions for SMEs.

“If you want to buy or sell a service or a product it’s advisable to cut the risks of not being paid with a contract which sets out legal parameters. Properly drawn up Ts & Cs will cut the risk of an expensive legal battle”.
Last year more than 4,000 businesses failed because of late payment and, according to the Federation of Small Businesses (FSB) many small companies have to wait up to four months or more for their cash from customers.
In dramatic circumstances firms can try and argue their case in court or seek some sort of arbitration but without properly defined Terms & Conditions it can be an expensive uphill struggle.
“If a business finds itself in a dispute over an unpaid bill and there are no properly defined terms and conditions it means there is no formality to the contract and as a result there is no lawful communication about when they are going to get paid – there is only an assumption and an assumption isn’t enough.” said Mr Reilly.

“Unfortunately, when it comes to cash flow morality or fairness isn’t going to put food on the table but a set of clearly defined Ts&Cs spelling out payment terms is much more likely to win a court case and ensure debtors pay up.”
Over the years numerous surveys and academic research have identified cash flow as among the top three worries for small businesses with more than half believing their very survival is threatened by non-payments from customers.
”The biggest problem any small or medium sized business faces is late payments. You can end up employing somebody on a full-time a salary just to chase up invoices and they nearly always get the same response – the cheque’s in the post,” said Gordon Mowat CA of Aspire Management Services.
”The stress involved in trying to chase overdue payments can be crippling to a business and many owners or managers get so involved they often fail to recognise many of the solutions which can help solve the problem.
“You don’t always have to use a sledgehammer to crack a nut, Sometimes a minor change in procedures or the Terms & Conditions can make a huge difference.”

Avoid Disputes – Managing cashflow

By David Reilly, Founder and Commercial Director of Create Ts and Cs

Risk management in real terms is about managing cashflow and providing protection for you and your resources (cash, time and emotional energy) from petty long winded disputes which can drain a business. The small claims process exists for our protection and is a very efficient process which has been modified to protect businesses but it only deals with disputes under £5,000 (please note limited companies still need a solicitor when represented in small claims disputes).

Disagreements can take up a lot of time and money. Disputes are not about being morally right, its about being protected legally.

Ensure your company has put in place the facility to mediate, at times of dispute, you can introduce the option of discussion with the other party rather than progress straight to court. Its sensible to introduce terms and conditions that help to avoid disputes by incorporating as much self remedy where possible and encourages discussion to resolve disputes.  If a dispute reaches court, Sheriffs and judges are interested in what points of law exist within the agreement, contract or terms and conditions and what written documentation exists to support either party.  Cashflow problems, your business and the moral rights and wrongs are unfortunately irrelevant, so ensure you can deal with possible future disputes by putting in place a relevant set of terms and conditions for your business.

Create Ts and Cs provide a bespoke set of Terms and Conditions for your business at a fixed price, this unique approach to individualising commercial Terms and Conditions allow Start up and SME sized businesses the opportunity to protect themselves, manage risk and guard against future unnecessary disputes at an affordable price. Download: terms & conditions | privacy policy