Make your mind up to put in place some contract safeguards

By PATRICIA BARCLAY
Published on 06/08/2012 00:00

A FRIEND was telling me how he had been cheated out of his first business by a partner who took over in his personal capacity contracts with their principal customer.

The business had grown organically and it had never occurred to him to put a contract in place regulating their relationship. This made it difficult for him to seek redress. He laid out several thousand in legal fees but ended up with neither business nor savings.

This tale is sadly all too common. Outright dishonesty is rare but misunderstandings do arise. The market and people’s circumstances change, undermining the original business plan. Ill health or family responsibilities may limit the time available for the business, while financial difficulties may mean one party wants to sell his or her share of the business or use it as security for a loan.

A business between a plumber and a joiner primarily to build kitchens may become less interesting to the joiner if the market swings more to fitting bathrooms. Where people have multiple business interests, there may be issues regarding how assets of one business may be used in another or even after the relationship has terminated.

There was an English case last year concerning the pop group Bucks Fizz. An ex-member of the group was touring with a new band called Bucks Fizz, whereas the other three members felt that they should have the right to the name. The issue rested on who owned the trademark, and the group with three original members lost out to the one with only one former member as he owned the trademark registration.

A written contract saves costs in the event of a dispute and facilitates addressing any problems with less risk of damaging the underlying relationship – particularly important when working with friends or family. Italso means that many areas of potential misunderstanding can be addressed before major investments are made in the business.

The agreement should, of course, be drawn up professionally with both legal and financial advice, and will normally include the following:

1 Who is contributing what to the business and whether any assets are to be owned by an individual or by the business.

2 The parties’ roles and the hours they are expected to work. Clarify whether the parties are to be allowed to work in other businesses and any related conditions.

3 How are decisions to be taken? Provide for regular management meetings and list what sort of decisions need to be agreed by everyone or by a majority of the parties, and what can be delegated.

4 How will you handle parties wanting to leave or inviting people to join? Commonly existing parties are given first refusal to buy out someone leaving, while joiners need the unanimous support of existing members.

5 How is intellectual property brought into the company by one party or developed inside the company (including business and product names) to be managed?

6 What happens to assets (including intellectual property, customer lists etc) if the business is wound up?

7 Are any clauses relating to a party’s death tax efficient and consistent with their will?

8 A mechanism for handling disputes.

While it is obviously better to sort this out when you are setting up your business, it is never too late to put something in place. You work hard to build a business so it makes sense to protect that investment and reduce the risk of costly rows. Remember – circumstances change, so regularly review and, if necessary, update the terms.

• Patricia Barclay is the founder of specialist legal firm Bonaccord Ecosse Ltd.