Starting a business with friends can be an exciting venture. You share a common vision, and there is often a sense of trust and mutual respect. However, when it comes to setting up a business partnership, it’s essential to take the necessary legal steps to ensure that everyone is on the same page.
One mistake that many small business owners make is drafting their own partnership agreements without seeking legal advice. While it may seem like a cost-saving measure at the time, it can lead to significant issues down the line, as was the case with a group of friends who came to us for legal advice.
The four friends decided to start a business together, and they drafted their own partnership agreement without seeking legal advice. One partner didn’t do much work and had little to do with the company’s operation. The other partners spoke to him on numerous occasions, but nothing changed, he just wanted to do the bare minimum whilst taking dividends out of the company. The three friends approached him and made an offer to buy him out, but he refused to sell his shares. The company was doing very well, and he knew in a few years he could sell his share in the company for far more than they were offering and stated as much to the other partners.
Unfortunately, the agreement wasn’t properly drafted, which meant that they didn’t have a solution to this issue and also no provisions to force the issue. The only resolution was to seek mediation, which the partner refused, so it led to the end of the partnership and the company.
With the company closing down the partners could also face financial losses. They may have invested significant time and money in the business, which will now be lost. They may also have to pay off any debts or liabilities the company has incurred. As well as losing their reputation and credibility in the industry and with customers who may see the closure of the company as a failure on the part of the partners, which can make it difficult to attract new customers in the future.
Furthermore, the partners may lose any intellectual property or proprietary information that was owned by the company. This can be a significant loss, especially if the partners were planning to use this information in future business ventures. Finally, they have also experienced huge personal and emotional losses as well because they had worked so hard in making the business a success.
Overall, the decision not to seek professional advice and draft a proper partnership agreement has had significant consequences for the partners and the business they have built. It is so important for business owners to understand the risks involved in not seeking proper legal guidance and to prioritise the protection of their business and partnership.
When starting a business, it’s important to remember that the legal structure of your business is just as important as your business plan. Seek legal advice from a McKenzie Consultancy & Legal to help draft your partnership agreement and ensure that everyone is on the same page. It’s worth the investment to protect your business and the relationships between partners.
This situation could have so easily been avoided if the partners had sought legal advice and had their partnership agreement professionally drafted. While it may seem like an unnecessary expense at the time, it can save you from significant issues down the line.
In conclusion, it’s not worth the risk of drafting your own partnership agreement without seeking legal advice. A poorly drafted agreement can lead to significant issues, including the dissolution of your partnership and the end of your business. Seek legal advice to ensure that your partnership agreement protects your business and the relationships between partners.
