Hello and welcome to this second video in our series: I’m Tim Cornell, Founder of Planned Ascent.
In this series, we will provide a complete guide and toolkit to help you, the founding entrepreneurs and leaders of established SMEs, build scalable businesses.
In this video, we consider safeguarding your business ownership – specifically the arrangements you put in place with shareholders and key employees to protect and future-proof the shares in your business, the equity it has created and the personal and professional relationships at the heart of it.
Key areas that we’ll explore in this video are:
- Legal Aspects Of Business Ownership And Issues You Need To Consider
- Risks of Shareholder Inaction
- Employee Ownership – Why It Matters And Challenges It Presents
- How To Get Started
- Next Steps
- Helpful Links
Let’s explore these and related issues in more detail. At the end, we provide links to further resources to help you.
Legal Aspects Of Business Ownership And Issues You Need To Consider
Ownership is the first of three issues at the centre of our Growth Mapping framework, and one which can and should forge shared and sustained commitment to a business. Yet without proper management, it can lead to disputes, an inability to reach amicable decisions and the destruction of value and friendships.
The legal aspects of ownership start at the incorporation of your business with the memorandum and articles of association. Many businesses simply adopt model articles when they register and leave it at that.
However, there are commercial, legal and other issues that might best be dealt with separately to the Articles, or that you may want to keep out of the public domain. There are other scenarios that you hope will never happen, that you should consider nonetheless.
Such issues can and should be addressed in a Shareholders’ Agreement, which is a private contract whose provisions can remain confidential to the parties concerned.
The matters you can deal with in a Shareholders’ Agreement might include:
- The death or unexpected disability of a shareholder
- The consequences of a family divorce for shares in your business
- Instances of shareholder misconduct
- A decision by one of your partners, who may also be a director, that they want to pursue another activity alongside your shared business interests
These are just a few examples and you can find more detailed information by using some of the helpful links provided below.
You should also take expert advice regarding which issues are best dealt with in the Articles, or in a Shareholders’ Agreement, to ensure that the two are compatible with each other and the prevailing law, and so will deliver the outcomes you want.
Risks of Shareholder Inaction
The point at which some of these issues first begin to disrupt a business may not be clear – for example, growing frustration at a business partner who gradually increases the amount of time they devote to running a parallel activity.
Once these sorts of issues start to show up, they can quickly generate a lot of energy, fuelled by powerful emotions such as anxiety or fear about the consequences for the business or the people it employs; guilt that you haven’t got a satisfactory solution in place; or even jealousy.
The particular nature of family businesses can add further and complex relationship dynamics.
If there is already substantial equity or intellectual property in the business, this may amplify the emotions and energy involved even more.
All of which can make ownership issues particularly hard to manage reactively, once they have arisen.
It argues the case instead for establishing a Shareholders’ Agreement at the earliest opportunity, and reviewing it periodically to ensure all parties’ continued consent as your circumstances and business evolve. The risks of inaction are simply too great.
Bear in mind that a well drafted shareholders’ agreement may prevent some of these issues from ever arising – not least because the possibility of them happening is acknowledged, the consequences are considered and remedies are agreed and made legally enforceable.
Remember also that the absence of a Shareholders’ Agreement may prevent a business from raising new funds, as investors will not want such critical issues left to chance.
Employee Ownership – Why It Matters And Challenges It Presents
Ownership issues can equally affect employees’ performance and their sense of fairness and well-being.
Some companies use arrangements such as Employee Ownership Trusts to embed employees’ interests at the core of their purpose, vision and culture.
In the right circumstances, this can create a win-win, enabling founders to plan an exit that is consistent with the legacy they want to create, and employees to feel that they have a meaningful stake and some control over their own futures. You can find out more about these using the links provided below.
Leaving it too late before considering if and how to enfranchise employees can, and commonly does, create unnecessary challenges, however. For many employers, this may be an area they are neither familiar nor comfortable with, not least because the options available and their relative merits are subject to changes in legislation and taxation.
Typically, the majority of employees don’t understand the options for employers to enfranchise them either, and the associated rights, obligations and restrictions these create. They may feel overwhelmed by their apparent complexity and value to them, which reduces their power to motivate. Some may have developed expectations as the company grows that are unrealistic and cannot be met.
As between shareholders, the risks of inaction are high.
For employers, the perceived cost and complexity of coordinating different advisers have also acted as barriers to enfranchising employees, particularly in small and medium-sized companies.
Happily, there are now digital platforms and service providers that seek to address these barriers and simplify the end to end process of designing and implementing an appropriate solution: one that will scale with your business and help you manage expectations.
A helpful link to one such platform is provided below, albeit we are not in a position to recommend one provider over another.
Finally, remember that prospective investors may insist that arrangements are in place to retain and incentivise key employees on whom future revenue and profit streams depend; so if you are looking to scale your business, this is likely something you will need to think about.
- Ownership issues can generate powerful emotions that can act either as a powerful force for alignment or as a hidden and destructive brake on your business.
- This strength of feeling can arise between shareholders, and with key employees whose continued contribution is key to your future success and value creation.
- To ensure this energy is channelled in the best interests of your business, you will need to identify, agree and document how you will deal with certain issues that apply to owners and employees, before they arise.
How To Get Started
To build a scalable business, start as you mean to go on where Ownership arrangements are concerned: invest time with qualified experts to explore the issues above and others that may be relevant to your personal context.
Don’t wait until issues arise because they will likely be more complicated and expensive to resolve.
Instead, act as soon as you are able to protect and sustain the relationships that brought you together in the first place, and those that have created value for you since.
We hope this brief overview of business ownership arrangements has given you food for thought or provided a timely reminder and prompt to take action.
Please leave any questions or comments below and check out the links that follow for useful sources of information, further insights and help.
If you want to understand more about how we can help you build a scalable business, book an exploratory call using the button provided. We’ll be delighted to talk to you. You can also check out the client testimonials and case studies on our website.
The next video in this series: How to Build a Scalable Business, will look at the second issue at the centre of our Growth Mapping framework: your business model.
Thanks for joining us today and we look forward to connecting with you again soon 🙂