Loss of value due to performance or insolvency can happen for any number of operational and market reasons like inadequate planning, poor management, lack of capital, expense blow outs, bad product, lack of client service, inability to get supply, seasonal factors, weather conditions, competition, pricing, court disputes, market forces and changes in government regulation.
Without constant care and attention, a great idea today can quickly become tomorrow’s winding up story as the original investors’ capital is lost due to factors like these.
Even the most astute and vigilant management sometimes cannot avoid the existence and impact of these sorts of things that all businesses have to deal with from time to time and sometimes, in respect of which, no amount of prior planning can help manage or avoid the problem.
However, there are a lot of other things that can happen in the ownership of a business that can impact on the value of an investment in it.
In the process of people putting their capital into a new business venture, we are often asked: “What are the things that investors can do to protect the value of their investment?”.
So we have put together a list of the top 10 ways to devalue a business investment, and they are set out below. If you want assistance with protecting your business against these things, why don’t you contact Long Saad Woodbridge Lawyers now.
- Not having a say in the decision-making process
- Equity dilution
- No profit distributions
- Poor exit strategies
- Director / partner liability obligations
- Working capital contribution obligations
- Personal guarantees being required of key people
- Shifting of profits
- No competition restraints on the investors and no protection of intellectual property
- Only court based dispute resolution
Unlike the operational and market type forces mentioned above, all of these 10 things that can devalue an investment are manageable (subject of course to getting agreement between the various investors in the business about how the issue will be dealt with).
A properly prepared business investment agreement (often referred to as a shareholders agreement, unit holders agreement or partnership agreement depending on the structure that is used for the ownership of the investment) is all that is needed to safeguard against these things that can cause loss of value of the original investment.
If an investor wants to do something about these things, it is necessary to vary the constituent document that regulates the legal relationship between the company, unit trust or partnership and the shareholders, unit holders and partners and through which the business is operated. That document is the constitution, trust deed or partnership agreement, depending on the entity. By effectively varying that document, each of these top 10 ways to devalue a business investment can be managed.
Just as most people insure their home, we see a well written business investment agreement as an insurance policy to safeguard against these things going wrong. If you would not buy a home without insuring it, why would you invest in a business without a well-prepared business investment agreement?
Business investment agreements are often referred to as a “business will” as they are like an individual making a will for when they die. Just as you shouldn’t die without a will, you should not invest in a business without:
- a well-prepared business investment agreement;
- making sure that you understand it;
- making sure you understand how it works.
While there is no correct way of dealing with these things, there is much more involved in jointly investing in a business and maintaining the value of that investment than just putting in the capital and hoping like mad that operational and market headwinds treat the investment kindly.
Disclaimer
The information in this article is general in nature and is not intended as legal advice. You should not do or fail to do anything in reliance on information in it. We do not accept any responsibility for any loss that you suffer if you do. You should seek professional advice before you do anything about the issues set out in this article.
