Reflecting on 2012 one of the things that surprised and disappointed Seaview Consulting was the number of business relationships that fractured and descended into protracted disputation during the course of the year.
We have witnessed a significant increase in the number of partners or shareholders deciding that whilst they may want to continue in business they did not wish to do so with their current business partners.
This year’s New Year’s resolution should be for business owners to revisit their documentation, particularly those aspects which cover exit provisions, to ensure it remains relevant and provides a clear process on how to conduct a smooth exit under varying circumstances.
Separation is a part of life and for many it is the right decision and an effective resolution allows all concerned to rule a line and move on. However, when the dissolution does not go smoothly it becomes an expensive exercise that drains finances and emotion in equal doses. The consequences of protracted unresolved business relationships have far reaching effects:
The cost of each party engaging legal representation
The loss of commercial value
Significant emotional toll on participants of the dispute
The ‘no holds barred’ approach deployed when matters go to court – airing dirty linen
Such human failings can destroy partnerships just like marital break-ups often lead to home lending foreclosures. Without some confidentiality agreement for protection this can quickly spiral out of control with information of a personal and sensitive nature aired in public.
However, without doubt the major cause for dissolutions escalating into significant disputes can be sourced back to poor or absent documentation around the agreed exit terms for the stakeholders.
A documented agreement should provide a road map on how to part ways with a minimum of disquiet and in a manner that maximises the value for all parties in an equitable way.
The process should be flexible and reflective of the reasons for separation, timeframes required for settlement and the process used to determine a separation value.
The triggers for separation fall into two categories - insurable or uninsurable events. Insurable events are usually well thought through but difficulties can still arise if procedural aspects around the management of the claims an remittance process do not exist, if valuation methodologies are not well documented, if payment timeframes are not clear and linked to receipts from insurers.
Furthermore, additional documentation is required to address matters outside the insurance process including procedures around the settlement of debts, the release of security or guarantees, and other external factors that may impact the business.
The CGT taxation treatment around insurance policies are complex, avoiding the tax office taxing a significant share of any proceeds is essential so confirmation of arrangements around buy-sell agreements need to be correctly structured.
Non-insurable events including the following examples of the varying reasons behind the desire for people to separate:
Desire to move to greener pastures
A partner not hitting contractual KPI’s or acrimony
Loss of trust
A sudden departure due to family or health reasons
Alleged theft or fraud
Relocation interstate or overseas
Financial stress or external demands (if equity used as security)
The difficulty is that no single document can predict the nature or reason for a request to separate, however, this does not prevent a business from documenting the framework in a manner to enable the effective and smooth management of the separation request.
The strength of any relationship can be measured in the ease with which parties can discuss and resolve differences in opinions or views in a manner that enables the relationship to grow and be rewarding. The inability to have open dialogue is an early indication of potential future breakdown and should also be a prompt to reflect on what documentation exists to enable an orderly exit should a separation be necessary.
The intent of the exit document is to provide a clear, balanced and fair process to facilitate an exit while taking into consideration the circumstances of the separation and the ability for the business to operate going forward and that any acquiring party receives an appropriate value for the assets they purchase.
In conclusion, it is beneficial to reflect on human nature. More often than not it is the accumulation of little things that destroys a relationship. It is rare for one isolated action to destroy a relationship but rather it is the aggregation of a number of little things. Humans are often very jealous creatures and if an individual perceives another individual is getting too many non-reciprocal benefits then tensions will surely surface. Ensuring your business has a mechanism and outlet to raise such concerns will prevent the snowball effect that may lead to a destruction of value and the end of a previously rewarding relationship.
In the absence of this or due to the need to separate it is essential a business has a clearly documented process.
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