Business implosion and how to avoid it!

A lot of businesses start off rosy, but can go pear-shaped when partners go off on tangents. The answer? Get it in writing! Recently, a colleague of mine set up a business and within just two years the company was ahead of targets and headed for greatness.

He had three very smart professional partners and a staff of 55 people. Everything was on track, growth was continuing and this company was regarded as a mover and shaker.

Just over two years into the business one of the partners decided that he wanted to go and contemplate his naval on a beach in Bali indefinitely! And this in the middle of a major merger that would take the company into the European markets.

And the bad news kept coming. This partner then convinced the CFO to join him in Bali. These two people were absolutely essential for the success of the merger.

So two key people went off to Bali (still with their shareholding) and the merger failed. The company went backwards for nearly eight months while the fallout was being managed. Partners were distracted and not focusing on the business.

What’s the point of this story?

The partners (all major shareholders) did not have a shareholders agreement in place. They had not sat down and talked through what they personally wanted out of life and out of the business, and they had not written down what their roles and responsibilities were. As a result, expectations varied and the partners did not really know each other.

And I’m surprised how many entrepreneurs don’t have a shareholders agreement in place. In my experience, partnership disagreements are a major cause of business failures.

I understand why this happens. The excitement of the start up, the camaraderie between partners, working closely together and the sense of achievement when targets are hit and everything looks rosy.

If ever there is a road paved with good intentions then this is it. Everybody intends to be fair, and they talk about fairness, but it’s just impossible to make it work until you get down to the actual details. And it only gains ultimate clarity when it’s in writing – a shareholders agreement.

And it gets very awkward. There you are in the excitement of a start up and it just feels bad to be the one to say “let’s get it in writing”. It’s deflating. But it’s also very important. Swallow hard, breathe deeply and get it in writing.

People and circumstances change.

How would your company be affected if a shareholding founder ended up in the divorce court. Do you know how that would affect your business? What if a founder were hit by a truck? Does his/her shareholding then belong to the spouse? Now there is a spouse with shares and perhaps decision-making power but with no understanding of the business. And you can’t assume that the person will be passive. These are real issues and need to be addressed.

When we started our business in South Africa we wanted to bring in a partner. He came out to Australia to spend a few days nutting out the shareholders agreement. In the end, we couldn’t agree. The partnership didn’t go ahead. And that was a good thing. We had different ideas about how to develop the business in South Africa. The benefit was that we all realised this before we went into business together.

Developing a shareholders agreement can be difficult and the outcomes may be unexpected, but these are the very reasons why you should go through the process.

Do your own research. Talk to entrepreneurs and colleagues about the pros and cons of shareholders agreements. Talk to investors.

In my next blog I’ll give you an idea of what should be covered in a good shareholders agreement.

Till next week…

Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.

To read more Gail Geronimos blogs, click here.