Do you own a medical centre or other healthcare business, and you are considering bringing on a business partner? There can be many advantages to expanding your business, like easing your workload, offering extra services to patients or growing profits. However, owning a business with another one or more people can add more risk and larger considerations from a financial and professional perspective.
You need to ensure you are taking into account the broader ramifications of owning and running a business with somebody. This is where a comprehensive and well-draft ownership agreement is essential.
A business ownership agreement (such as a shareholder agreement, unitholder agreement or partnership agreement) is a legal agreement which governs the business proprietors' relationship. It may vary in size from a simple 2-page document to a 60-page contract.
Ownership agreements protect ownership interests and record the rights and entitlements of each party. The agreement can help to lessen the risk of dispute in the running of the business by setting out agreed processes for dealing with contentious issues between the directors and / or the owners.
An ownership agreement can be varied at any time by consent, so the owners are not forever locked into the arrangement, and can amend it over time as the needs of the business, and the owners change.
An effective ownership arrangement will incorporate rules for:
- Profit share plans.
- Cash distributions (cash being different to profit).
- Decision-making processes, including tiebreakers.
- Employment of staff and the commitment of others.
- Expulsion for improper behaviour or poor performance.
- Hours spent in the business.
- Absence because of leave or ailment.
- What occurs if an owner goes on parental leave
- Prohibitive covenants on exiting the business.
- How an owner exits the business.
- Another owner joining the business.
- How a dispute between the owners is resolved.
- Capital expenditure arrangements.
- Owner meetings and decision making.
A common situation is that an owner declares their intention to leave the business, and the rest of the owners are left wondering what their next step should be with no clear exit strategy. The business has no ownership agreement in place and, with the parties in dispute, lawyers have to be engaged.
Instead, a well-drafted ownership agreement with legal advice can, in addition to other things, outline what ought to happen when an owner leaves the business. This might incorporate a set notice period (eg. 90 days) which can be shortened by agreement, a valuation method for calculating entitlements, and a process for replacing the leaving owner. It should incorporate any prohibitive agreements, for example, exclusion zones, restraints and other limitations on the owner being in business in competition with the original business, when the ownership relationship ends.
Some of the other critical areas that owners should cover off when one of them is looking to leave the business are:
Patient care
What is to happen to the ongoing care of the existing owner’s patients or clients? Maintaining continuity of care and managing patient records is key.
Financial privileges
At the end of a business relationship, disputes regularly focus on the leaving party’s financial entitlements (i.e. What are my shares worth? When will I receive my dividends / profits?).
Some businesses work on verbal or “handshake” agreements, however, when you don't have anything in writing to guide on assessing value of an exiting owner’s interest and any other matters they might be entitled to at that time, this can be a particularly difficult and expensive area to navigate.
Restraints & Non-Competition
Restrictive covenants that limit where leaving owners can set up another business (e.g. not inside 5 km of the current business location) are worthwhile and enforceable where there is good and valuable consideration paid for the departing owners’ interest.
Is a written ownership agreement necessary?
The answer is undoubtedly 'yes'. Without a written agreement, the business ownership relationship will essentially be run with little planning for and a shared understanding about the issues that could arise in the management of the business and succession for its owners.
A well-composed ownership agreement drafted by an appropriate legal practitioner is essential to lay out a practical framework for running the business and the relationship between the owners. Setting up the agreement can be tedious and perhaps “not a priority”, but getting it wrong (or, worse still, no agreement at all) can lead to expensive, time consuming and complex issues in the future, such as the winding up of the business or an owner leaving and competing with the business.
An appropriately drafted ownership agreement won't stop partners from falling out with one another; however, it will explain their commitments to one another and to the business and help to resolve disagreements between them with a clear process if these issues cannot be resolved.
At Burke Lawyers our commercial lawyers have the experience and expertise to provide the best advice for medical and healthcare industry businesses, medical and other health practitioners and allied health professionals.
Contact us today on +61 3 9822 8588 or via email HERE.
