One of the by products of an economic slowdown can be an increase in the breakdown of business relationships. Just as financial problems put pressure on marriages, business partnerships can become strained as profits reduce.
It’s relatively easy to remain harmonious when there’s plenty of cash to go round but not so when the business is barely able to keep itself going – much less support two or more families in the lifestyle to which they’ve become accustomed in a buoyant economy.
Things that were mildly irritating in good times can become major sources of conflict when the going gets tough – like someone taking extra holidays, having a more expensive company car, or putting their golf club membership through the business. Because when resources are stretched every bit becomes more valuable – be it time, cash or commitment.
Businesses that have not had partnership or shareholder agreements before need them more than ever in difficult times. Businesses that have such agreements need to review them; for example, entitlements (remuneration, benefits and drawings) that were possible in the past may now not be realistic and buy-out valuation formulas may now not represent the market.
In establishing or reviewing your partnership agreements you should consider the following key issues:
Where do you intend to take the business? Has your desire to keep running it dwindled with the profits? Are you now more inclined to sell or even close it? Business partners need to agree not only on a pro-active strategy to meet new trading and economic conditions but also on what will happen if this does not work out. If you don’t agree on strategy then you need to make realistic provisions for going your separate ways in a planned, orderly manner.
What would you do if the business started making losses? How long would you, or could you, survive? Some business owners have pre-determined rules – such as sale/closure after three years of losses. Others allow a percentage of reserves to absorb losses, or agree to close or sell at the point that the working capital ratio slips to less than 1:1. (Certainly you cannot keep trading if the business becomes insolvent, and monitoring this becomes critical as losses are incurred.) Whatever trigger point you use it is important to agree on it early while you are still rationale. It’s much more difficult when you’re under every sort of pressure after battling a series of losses –fending off aggressive banks, creditors and distraught spouses.
You need to be clear as to what you are each expected to contribute to the business in terms of time, skill and cash. You need to specify the limit of cash you may be required to commit and what would happen if the business required additional funding. If one of you was willing and able to contribute more than the other(s) how is this to be treated – as debt or additional equity? If debt, what would be the terms; if equity, how would this be valued and how would it change the balance of control of the business especially in a 50/50 partnership? You need to decide what issues would always require a unanimous decision of partners/shareholders and whether additional equity would give the holder the right to make certain decisions without the consent of the other(s).
Decide now what you would do if profits were insufficient to fund business strategies/commitments and partners drawings. As a first step in uncertain times businesses often reduce monthly drawings to the minimum needed to meet personal commitments and then top up with a quarterly additional drawing, dependent on the quarter’s profitability and cash flow.
Indeed, the most difficult balancing act is between funding the continued operation of the business and meeting the personal financial needs of the owners. You need to agree in advance on the priorities and set your business plan and budgets accordingly. If you can’t agree now you may need to reconsider your partnership. And, most importantly, each partner needs to talk to his/her family about the decisions and policies they have made. Too often families are kept in the dark, perhaps in the interests of protecting them from the stress of the difficult business situation, perhaps because of the embarrassment and loss of face felt by the bread-winner.
But this is the time when all stakeholders need to buy into the decision making – and families, particularly spouses, are important stakeholders. If belts have to be tightened they (a) need to know, (b) need to understand why and (c) have to be comfortable with the overall strategy. After all, it is usually their home that is on the line.
The way to tackle an economic downturn is to take it head on with a pro-active strategy and an agreed defensive plan in which all stakeholders are united. The alternative is to put your head in the sand, pretend it’s not happening and then try to deal, unprepared, with the crises as they arise, with their attendant blaming, resentment, anger and despair – a situation few relationships can survive.