Ask the Expert: I’m Having Issues with My Business Partner Who Has Stepped Back

Our expert for advice for founders and CEOs, Avril Millar, is an experienced Non-Executive Director with a >10+ year portfolio career for both established leaders and high growth SMEs, primarily in the financial services sector, as well as technology, healthcare, consultancy, leisure, oil and professional services. This follows 20 years of experience as founder and director of Andersen Charnley, a private wealth business which grew to £500M assets under advisory, and early background as a Civil Engineer and Maths & Physics teacher. Avril has led the turnaround of a global recruitment business in the midst of the financial crisis, and subsequently transitioned into a non-executive and advisory career for organisations, including the world’s number one online FX broker, FXPro, a leading UK natural IVF clinic, Create Fertility, and a Silicon Valley brand technology start-up, Versus Systems.

Q: I co-own my business with another person which has worked well for the last 10+ years but in the last 12 months or so he is looking to take it easy and have more time away and work less hours, just as I am looking to push forward and expand. We have an equal shareholding, so I am feeling now slightly aggrieved that I am working all the hours and he is taking the same dividends. Any advice on how to move this forward?

Avril’s Answer: I’d love to tell you there is an easy solution to this, but I can’t. How you solve it will be down to the personal relationship you have with him and whether you can be honest with each other. Many business owners, especially those of small businesses, remunerate themselves by small PAYE payments and dividends based on profits. This can be very tax efficient, but it also means that you never address the issues of who is doing what, and how much that work is worth to the business. Typically, if I am asked to advise on a start-up, I ask that they bring in director service contracts from the outset as this allows the founder directors to set the expectations of what each party will do. Whilst it doesn’t stop people taking the piss frankly, it does set the tone around the fact that people get paid for actually doing work.

As businesses grow, it becomes easier and more acceptable to bring in proper salary structures, along with bonuses, and use dividends for genuine profit division at the end of successful years. In your case, it sounds like dividends are your main source of income and you are also paid equally on whatever PAYE you take. Sadly, I think this means having the hard conversation about where the business is going and about what you are each contributing. Ideally common sense will prevail, and you will be able to set a new structure of salaries which reflect the actual work people are doing (and actually have job descriptions and expectations attached to them) with performance bonuses if appropriate, and dividends will then become a much smaller part of the overall financial take from the business.

A lot of this will depend both upon your personal relationship with your business partner and any leverage you might have outside of your relationship will be dictated by what the Articles of Association and your Shareholders Agreement state. Again, these latter two documents - which become so important at times like this - are very often simply model articles which provide no recourse in the case of difficulties. Shareholder’s Agreements, if they exist at all, usually don’t help as they have not been constructed to deal with future conflict. It’s very much shutting the stable door after the horse has bolted, but I urge every new business to hammer out a very comprehensive Shareholders Agreement right at the beginning. If it turns into a fight, you’re getting early warning signals about future problems.

So I think you need to make a cup of coffee (or grab a bottle of wine) and sit down with your business partner and talk about its future growth and your hopes. You need to both assess what you feel your actual daily work and contribution is worth to the business. You need to put a line in the sand and suggest to your partner that, as you both want to work differently now, the business needs to be structured differently internally as to how you are paid. Talk about your individual roles, design your job descriptions, and allocate a remuneration structure to each. Inevitably this will be a bit less tax efficient, but it might be less stressful psychologically to you. Of course, he may disagree and unless your Shareholders Agreement and the Articles make provision for handling this kind of dispute, there’s not much you can do about it. And the more you can position changing how you pay each other to give him the quality of life he wants for a fair pay, whilst you take on the continued stress and effort of running and building the business (which will, in the event of a sale, give him equal capital benefit,) the more likely it is that he will come to some sort of agreement.

Avril will be answering questions each month, so if you have a topic you need some support with, please get in touch via hello@55redefined.com