Nothing lasts forever. Take marriage. A binding contract is struck in public, with both partners vowing to stay together “till death us do part”, yet one in five South African marriages end in divorce. If someone had mentioned these odds when my future wife and I were about to enter our marriage contract, we’d have laughed it off. If they suggested we insert a clause in our contract setting out the details of the process we’d follow if we decided to part company, we’d have thought they were deranged.
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In our day, a marriage contract was a standard template couples signed as a formality just before the wedding. Little did we realise that it was one of the most important documents we’d sign in our lifetimes, and that the flippancy with which we treated it could have led to an expensive and highly unpleasant experience. Then again, which starry-eyed couple entering marriage is able to give intelligent consideration to a time when they might part? And that’s just the problem…
One day, whether you like it or not, the beloved family farm is likely to be sold. Equally, every single business contract will end. However, when two parties enter a partnership of any sort, trust levels are high, vision is shared, and it’s very difficult to discuss the subject of breaking up.
Exit clause
Consider the case where two enthusiastic young entrepreneurs invest time, effort and cash in starting a business, without making any upfront arrangements for either party to exit or for them jointly to sell the business. If families are involved, it’s doubly difficult for them to contemplate such an eventuality and doubly important for them to do so. As we so often see, emotion in families can reach seismic levels and lead to huge heartache.
Whatever you own, whatever contractual relationships you might have, you need to be hard-nosed enough to plan an exit. Most attorneys will draw this to your attention – if they don’t, I suggest you go elsewhere for legal services. The rules of engagement are important, but the rules of disengagement are vital.
No clue
Don’t forget you might not be around when the time for parting comes. Make it easy for your successors. Save them the trauma, and by doing so – who knows? – you might ensure the business stays in family hands. Time and time again, I find that long-standing business partners, reaching the point of an exit due to their personal circumstances or retirement, perhaps, have no clue as to how they’ll do it, or whether there’s any contractual arrangement in place.
If the business is a company, the legal document of incorporation will provide the mechanism. In a private company, this is normally a right of pre-emption, where the shareholder wishing to exit is required to offer their shares to the other shareholders before going outside. But that’s all.
Be certain
There is, for example, no basis set out to deal with the vexing question of the price. If this issue is dealt with upfront, it removes a major potential area of future disagreement. And while the services of an attorney are necessary, beware. Their training is to draft contracts for use in litigation – when one side feels the need to sue the other. Consequently, they often use words which the layman can’t understand, and write sentences which break all the rules for clear writing.
Smart people, however, don’t shrink from asking the ‘stupid question’. They make sure they understand every word in the contract and, most importantly, the exit clause. It’s far better to walk away and let a deal die that doesn’t have a fair and easy way to exit.
Contact Peter Hughes at [email protected]. Please state ‘Managing for profit’ in the subject line of your email.
This article was originally published in the 01 February 2013 issue of Farmers Weekly.
