Bad Partnership Agreements or not having one can cost you. Singapore’s corruption-free and efficient civil service makes it widely cited as one of the easiest cities in the world to start a business. But, while it is easy to get a company started, it is also just as easy to make major mistakes right from the start. Here are the 5 mistakes commonly made by business owners when forming new companies, which may threaten their business or their families.
1. They try to get by with oral Partnership Agreements.
Although oral partnership agreements are legally binding in Singapore’s courts, it is usually not enough. Any verbal contract often includes implied deliverables by each partner, and implicit terms and conditions may apply to each of these.
Whether you are starting a business, bringing in new partners or increasing the number of shareholders, a written contract is essential for spelling out the obligations, privileges, protections, and rights of each party.
Winging it on a verbal contract is a recipe for disputes when expectations are not met, obligations not discharged, or if external liabiliities arise during the course of business.
A company that is constantly embroiled in unproductive disputes over “who said what and when” simply folds up from within.
2. They forget to sign a Buy and Sell Agreement (BSA).
Having partnership agreements is just the first step. What’s spelled out in the agreement? Are all the clauses fair and clearly-phrased?
Not only should the agreement be written in unambiguous language, it should also contain clauses that provide for future transfer of business interests; this is known as the Buy and Sell Agreement (BSA).
The BSA defines the scenarios (triggering events), such as death, bankruptcy, disability, deadlock, or retirement, in which shares can be bought or sold, and is the legal bedrock for the future sale of your share of the business, or your purchase of a partner’s shares.
Buying and selling of shares are sometimes based on the paper (book) value of the company, ie. paper book assets minus paper liabilities on winding up. But there are scenarios where the shares may be priced at a premium over book value.
This includes scenarios, such as on the death of a shareholder, where the remaining shareholders may want to buy the beneficiaries’s shares at as low a premium as they can.
On the other hand, the beneficiaries may want to sell their bequeathed shares at the highest value that they can. The BSA is a document where every shareholder agrees on the method of calculating the valuation of the shares, when eventuality strikes any shareholder.
The BSA thus needs to be a document that can withstand scrutiny in a court of law. A trust account, managed by a legal trust company, should also be set up to see to the professional administration of the BSA.
Lastly, there are times when the shareholders may not have enough funds to buy over beneficiaries’ shares; an insurance policy to fund any BSA buys would be essential in the case of eventuality.
3. They fail to ring fence their family from company creditors
Most businesses borrow money for various reasons, such as to tide over periods of low cash flow, to stock up on inventories, or for paying salaries. At times, loans of millions of dollars may be involved.
Banks may require a company shareholder to be a personal guarantor to these loans. If the company goes into default on the loans, the company may be forced to shut and the shareholder may be forced to consider bankruptcy.
In this scenario, however, often it is the shareholder’s family members that are most adversely affected.
Or, if the shareholder (who is the personal guarantor to his own company) passes on before his time, banks often lodge caveat on their estate, thus family and beneficiaries get less than what they would have gotten if proper steps had been taken to ring fence these debts.
4. They fail to ringfence the business from the loss of a key person
When the shareholder himself is the key person in their business, things will definitely get worst for the company, as well as his family members, if something happens to him.
The company’s clients may refuse to renew contracts, and other creditors may ask for payment, right at the time when the key person is lost… In that event, the key person’s family and beneficiaries may end up in a negative financial state!
5. They fail to plan for rainy days
And that brings us neatly to the need to set aside funds for rainy days, while the company is still making money.
When most companies start making profits, company partners often cash out and go to town, or invest all the profits back into the business. But good times don’t last forever.
No business is guaranteed to make profits perpetually, especially when the economy hits crosswinds. What happens if you reinvest all your profits in the business and the business fails? At best, you have nothing to show for all your efforts; at worst, you will have negative equity that can also affect your family’s finances.
Hence, you should consider investing part of your company’s profits in a retirement policy. This can be held by your company’s trust account, so that even if the company goes into a downward spiral, you can still be assured of a continued income for yourself and your family.
Manage risk with business insurance
Want to know more about how to shield your business and family from risk?
Plan for the future with KWG Financial Partners. We have the experience and understanding needed to craft Legal and Financial Solutions that will protect your business and family comprehensively.
- These solutions include:
Drafting of legally sound Buy Sell and Partnership Agreements
Setting up of trust accounts, managed by a legal trust company
Policies to fund buying over of shares when the BSA is invoked.
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