When business is a Family matter Print E-mail
Corporate governance is a topical issue for public companies but these same problems face privately owned companies that have the added complexity of at least some of the owners also being involved with management of the business.

Privately owned businesses can become distracted by governance issues, resulting in a range of problems from neglecting customers due to loss of focus on the business through to costly disagreements between shareholders.

Few family businesses survive into fourth-generation family ownership. One key reason is the difficulty in keeping the interests of the shareholders aligned as the family grows.

Often external issues are the source of these problems. The needs of a shareholder for money, an opportunity to buy or sell the business, or the desire to exit the business are common examples.

When privately owned businesses are owned by a number of people it is important to set out some ground rules over fundamental business decisions and the management of the business.

Many of these issues can be resolved if an agreement is reached at the outset when the relationship between shareholders is strong and enthusiasm for success is high.

Drafting a shareholders' agreement is primarily a legal issue, but because of the broad range of issues involved it is important the shareholders, their accountants and lawyers work closely together to prepare the agreement.

There are five reasons why privately owned businesses should consider a shareholders? agreement:

  • Strategic decisions. Some decisions are fundamental to the ownership of the business. For example, selling the business or admitting a new shareholder. It is easier to make these decisions if there is a clear set of rules to follow. A shareholders' agreement can be used to determine whether these decisions need to be unanimous or by a majority of, say, 50 per cent of 75 per cent. This way, when it is time to make the decision, the focus is on the outcome rather than the process.
  • Shareholder exits. A shareholder may exit for a variety of reasons such as divorce, death, bankruptcy or non-performance. This process will be much simpler if the shareholders have already agreed on how to value the business at the time of exit and carried out each year, whether existing shareholders should have the right of first refusal and methods of payout.
  • Remuneration of working shareholders. The remuneration and working conditions of owners are common causes of discontent between shareholders. It can be advantageous for the shareholders to agree on the process of approving pay rises for working shareholders. Some businesses use external consultants to decide on market rates of remuneration to avoid any friction when deciding remuneration.
  • Governance of the entity. If there are shareholders who are not working in the business there will be additional governance issues. Keeping non-working shareholders informed regarding the business builds trust, which can prevent problems in the longer term, and this could be included in the shareholders' agreement. Other issues include whether the financial statements should be audited even if there is not a legal requirement and how should deadlocks in decision making be resolved?
  • Funding requirements. At some stage the business may require additional funds. Again it is useful if the shareholders agree upfront on the terms of any loans to the business.

The issues to be resolved include agreeing repayment terms and the interest rate, if any, on the loans.

Shareholders should also agree on what should happen in the event that a shareholder is unwilling or unable to make a capital injection.

Tony Martin - Director Advantage One
 

Contact Details

Advantage One (SA) Pty Ltd

83 Fullarton Road
Kent Town SA 5067

Telephone + 61 8 8333 1944

Email advantageone@advantageone.com.au

Advantage One (Vic) Pty Ltd

312-314 Hawthorn Rd
Caulfield Vic 3162

Telephone + 61 3 9532 8077

Email advantageone@advantageone.com.au

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