Some business is still done on the basis of a handshake, and to some extent, it would be better if this was how all transactions occurred.
But, this is clearly not the reality for most transactions.
This is where the legally binding contract comes into play.
Some transactions are quite vanilla in nature - for example, a purchase contract for a house.
These tend to be done using the template provided by the real estate peak body in each state. There is room to add in conditions and alterations, but normally they are pretty standard.
In contrast, other contracts can be quite convoluted and complicated, as they deal with matters that are much more complex than mainstream agreements.
With these types of contracts, there is a lot of flexibility with the conditions that go in the agreement. As long as both sides are happy with the terms, normally a valid contract is formed.
Related reading: Long-term plan helps businesses thrive
I recently attended a professional development session put on by a lawyer I know quite well.
The topic was division of equity within a business. There were some very innovative ideas put forward.
One of the quandaries that comes up in these types of scenarios is how to value relative contributions, and what this means in respect of the percentage of ownership.
This conversation can be tough, particularly when the parties are related or good friends. Questions that are difficult to answer could include how much is an idea worth? Is cash more valuable than doing the day to day work or vice versa? How does ownership of the business change over time, depending on relative input of resources?
Regardless, these difficult questions and conversations are crucial for the long-term success of that particular business. Initial agreement on guiding principles is, I believe, critical in these situations.
Historically, the "she'll be right" approach to business has been the norm. This still happens in many instances, and if this works for those parties, then go for it. But it is not an approach I would recommend.
The process works best when the respective parties have reached broad agreement before briefing the lawyer.
As the quantum of dollars gets higher and higher in agriculture, and the level of professionalism ramps up, properly constructed, binding agreements are paramount to ongoing success.
This is especially the case where the agreement involves non-family members.
Furthermore, the contract needs to be drafted by an experienced lawyer. From what I have observed, and been involved in, the process works best when the respective parties have reached broad agreement before briefing the lawyer.
The lawyer can then get clarity on all the issues, and introduce any other ideas into the process.
The lawyer is not there to mediate between the parties.
It is highly likely they have seen the pitfalls before and can mitigate any issues prior to them arising.
Related reading:Investing in Aussie agriculture makes sense to foreigners
Indeed, it's not a one-size-fits-all process, and the documents need to be carefully considered and thought through.
Sometimes the respective parties may choose to get external advice on how the agreement may impact their particular situation.
Finally, good legal advice is worth paying for. It is an upfront cost for sure, but I think of this as an investment, not a sunk cost.
If all parties to the agreement know the rules of the game before they start, it will save angst down the track.
- Details: bagshawagriconsulting.com.au