Freelancers' Questions: How to avoid deadlock with my new business partner?

Freelancer’s Question: I have recently launched a second creative business which I own half of, alongside its other founder, a former freelancer like me, who also has a 50% share. As equal partners, we both work in the business full-time and would like to ensure that a safeguard is in place in the event that we fall out with each other. I’ve read that a shareholders’ agreement is the best way to avoid a deadlock, but what should such an agreement comprise?

Expert’s Answer: You and your business partner agreeing about the worst-case scenario is always easier to do before it happens, so you are right to be looking at putting a shareholders’ agreement in place at this early stage.

Assuming it is properly prepared, the agreement should set out a solution in the event the two of you become at loggerheads with each other. The simplest option is to give one of you a casting vote, although this goes against your equal shareholding in the business. Therefore consider appointing an independent third party to have the casting vote if a business dispute between the two of you arises.

Alternatively, a more formal avenue open to you is Alternative Dispute Resolution, whereby an independent facilitator helps to reach an agreement between the two warring parties on how the business should proceed – or how it should be broken up.

In the event that the business can survive one of you leaving, a mechanism for one of you to buy out the other may be appropriate. Ideally, use a system whereby an offer for the other person’s shares is also an offer to sell at that price. This will allow you to identify a value at which both of you are willing to remain in the business or leave it. Finally, as a last resort, the business could be wound up.

The expert was Jon Sutcliffe, partner at Top 20 chartered accountancy firm Kingston Smith LLP.

 

11th September 2013

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