What Happens When Business Founders Want to Split Up?

What Happens When Business Founders Want to Split Up?

What Happens When Business Founders Want to Split Up?

Business Break-ups Can Be Messy!

Unless the founders had something clear in writing beforehand, there is no end to the variety of things that can happen when founders want to go separate ways.

If there is nothing in writing and the split is not amicable, all sorts of time consuming, distracting and stressful things can happen. 

Here are some of the worst-case scenarios we have seen in practice, all where there was nothing in writing to start:

1. A Founder Dies Unexpectedly  

Whilst tragic at a personal level, it can also be very difficult for a business where one of the founders passes unexpectedly. Sometimes the family is aware of their business involvement, and sometimes they are not. In this case the family wanted the company to buy out the deceased founder’s interest in the business immediately and had some unrealistic expectations of what that interest was worth. 

Animosity was growing between the parties due poor communications. We were able to present a strategy which allowed for the progressive buy out of the deceased founder over a two year period, without interference by the family in the business, and at an amount set by a ‘desk top’ valuation completed by the company’s accountant. The family of the deceased founder were offered the opportunity to get an independent valuation, but at their cost, and the $11,000 price tag put them off.

2. One Founder Is Stealing Money From The Business, And Another Finds Out

Unfortunately, this is not an uncommon scenario. 

We’ve seen this occur in a variety of businesses from software to building and construction, and it is rarely pretty, and usually a long and slow process of separation if nothing was agreed in writing when the business was founded. 

Too many people think “we don’t need a shareholder agreement, we will be fine” when they are all excited about getting started, and then when things go wrong, they have no protection.  

In one example with a tech company, there were four sets of lawyers involved and the end result was a comprehensive deed of release covering the transfer of shares, forgiveness of debts, payment of money, and indemnities from the exiting partner. There were no admissions of liability in the deed. The deed took more than 15 months to negotiate and some shareholders meetings to approve decisions. 

As long as the negotiations remain between the parties and their lawyers, law enforcement need not be involved. There is nothing that legally requires you to incriminate yourself or anyone else in the business. When fraud or theft is discovered and reported, it is usually through a third party.

3. A Founder Walks Away Without Notice, Making Demands

Things happen in people’s lives (like death, illness, an amazing job offer etc), and they can suddenly want out. This can be very hard on the people who want to continue with the business and a shock if not contemplated before one partner leaves. Business break ups are often referred to as like going through a divorce by the people affected. 

Sometimes people want out, and they want their money, whether or not there is any owed to them at the time. Many people exiting a business think in terms of the future value of the business, rather than where it is as they exit, and vastly overestimate both what it is worth and the capacity of the other parties, or the business to pay for the exit. 

If shares are to be transferred to existing business partners, then those individuals need to have the money to purchase the shares at the agreed value. In a start up phase, this is likely to be $1 a share and not onerous, but if the business has been running for a while and has some value, the remaining shareholders might not have thousands of dollars required to purchase those shares.

If the shareholder is exiting and the company is making a distribution or buying back the shares (not a simple process) then there needs to be sufficient funds in the company to pay out the exiting party. 

As long as you have clarity around ownership of assets, intellectual property and a realistic value of the business, then its just a process to be undertaken when someone leaves suddenly. If there is nothing in place, then it is a process of negotiation and often heartache before a resolution can be agreed. 

4. A Shareholder Stops Contributing

 In situations where you have people with different skills coming together to build a business, not everyone necessarily has the same energy to keep the business on track. We’ve come across several businesses where a lot of effort was required of one party in the initial set up (for example someone building an App or a Website) and then their contribution become maintenance only. Another person in the business might be responsible for promotion, and there work is constant, requires review and reinvention, and never lets up. 

An example we have is a digital business where the person responsible for service delivery got fed up with the lack of interest of the developer who originally built the website for the business. Their ongoing contribution was minimal and yet their deductions from the business stayed the same and the service deliver person felt like they were working to support two families, without any recognition.  

Differing levels of effort over time could have been written into a shareholder agreement and appropriately dealt with, with the service delivery person gaining a greater interest in the distributions over time. Unfortunately, they had nothing documented. Fortunately, the exiting party, being the person who initially built the site, was prepared to accept an independent valuation of the business and to be paid out over six months rather than an immediate exit. 

In another tech company, the exiting person was someone who thought that they were indispensable to the business, but kept upsetting customers to the extent they left. Again, and independent valuation was agreed and they accepted payment over time, but the process of getting to that point took 4 months and was disruptive to the business.  

5. A Founding Partner No Longer Gets On with Anyone Else In The Business

This was a strange scenario and there was no shareholder agreement. One of the founders had moved into the position of CEO of the business but was no longer on speaking terms with anyone in the business, whether other founders or staff. There were six founders, four of whom no longer had any involvement in the day-to-day operations of the business, but all were looking for a financial exit. 

The company did have prospects, but a sale was not going to be possible whilst the CEO still had voting power to stop it.  There was not enough cash in the business to buy out the CEO without adversely affecting cashflow. 

Through a succession of negotiations including an independent business advisor, we were able to get the CEO’s agreement to retire and stop being involved in the day-to-day operations, as well as converting his shares to a preference share which would be paid first in the event of any declaration of dividends or sale. The preference share had no voting rights. Tax consequences for the business and the individual were also examined before the transaction went through. 

Business operations were a lot smoother without the former CEO’s involvement and a sale was achieved within 12 months, with all founders getting paid. 

It is always easier to think through future scenarios and what is fair when everyone is excited about the business and getting started, and still friends. It is significantly harder, and more costly, to attempt to resolve an acrimonious split a couple of years down the track. 

We provide clients with questionnaires to help identify potential needs in the business, and how people might exit to get you thinking about what might become important when you get started, whether setting up a joint venture or a shareholder or unitholder situation. There a lots of options available.

How can Onyx Legal help you?

If you are or plan to go into business with someone else and you’d like to secure the future of your business, make an appointment with us to talk through your options. 

What To Think About Before Signing A Standard Commercial Lease Or Retail Lease

What To Think About Before Signing A Standard Commercial Lease Or Retail Lease

What To Think About Before Signing A Standard Commercial Lease Or Retail Lease

We work with both landlords and tenants in Retail Shop Leases (RSL) and Commercial Tenancy agreements. This article is focused more on tenants.


What are some of the most important considerations that people should keep in mind before going into a lease?

Firstly, know the transaction that you’re entering into. 

It’s really important to know whether your documentation matches your intention. If this is a commercial lease, then typically you will be using a standard REI template contract, but if you’re entering into a retail shop lease, the format and content of the lease will be quite different. 

The reason this is important is that if it is a retail shop lease, then the tenant is afforded greater protection by law.

It is fundamentally important to get it right from the start. Your lease will last for years and has the potential to affect your business. 

Don’t be tempted by somebody saying to you, “Look, it’s quicker. This will save us money. We’ll just use a standard REI form.” It’s false economy because you could miss out on those really important protections, which can make the world of difference, particularly three, four, five years down the track.

“As you know, I work with retail and commercial shop leases from the outset in drafting and negotiating, but also when the parties are in dispute, as a mediator. I sit and I listen to both sides of the fence, arguing parts of the lease that was prepared five or seven years ago. I see things like someone trying to argue that QCAT, which is what’s meant to be a low cost, efficient and fast access to justice, with a specialization in retail shop leases. What I see is landlords perhaps trying to frustrate that process by saying, “Well, there’s no jurisdiction here because these documents are for a commercial lease, not a retail shop lease.” That in itself can cause stress, delay, expense for everyone. 

To circle back, know the transaction you’re entering into!”

Once You Know What Kind Of Lease You’re Entering Into, What Comes Next?

Tenants are often really excited by this stage – you’ve been doing some negotiations, you’ve found the premises. It seems ideal. 

Now is the time to slow down. Please slow down. 

You’re not on anyone else’s timeframe, but your own and your business. As a business owner, that is incredibly important to understand, and to stick to that, especially when you’re getting pressured.

You can be told there’s no flexibility on the other side, this must be done by a certain date. Slow down. 

Slow the process down and take advantage of the fact that you’re not in a rush to do this, or you shouldn’t be in a rush to do it, but this is your opportunity to design the best lease for your business. You don’t really get that opportunity at any other stage. Slowing down, making sure the documents are right is really important.

There are three stages to this leasing process. 

Negotiation, lease offer, and lease. 

In each of those stages there is some crossover. But with your lease offer, a lot of people, particularly landlords, come to their solicitor once the lease offer is signed. Tenants tend to think they should do the same. In fact that is not the best case for either party. You can come at any time to your lawyer to ask about the lease offer.

Part of that slowing down for a tenant is really important, because if you bring that lease offer to a lawyer to look at for you (and even your accountant as well for the accounting and financial taxation advice, because lawyers aren’t accountants) you have that opportunity to design a really perfect fit for your business before the lease offer is signed.

When you think about the length of time that you’re entering into this lease for, the more thought and time you can take at the beginning to really consider where your business is going to be in a few years’ time, also what’s in the market, the first property that you find may not be in fact the best one for you. 

If you properly consider these things before you sign a lease offer, you’re at least not committing yourself to potentially lose a deposit amount or binding yourself to some terms that in three years’ time are going to look not nearly as good as you thought they were when you signed the lease.

Due Diligence

Before entering into a lease, do your due diligence. What does due diligence mean? 

It’s things like comparing like premises in other suburbs or other centers. Finding out what incentives landlords are offering. Finding out whether there have been any security issues or flooding at that premises.

Start from the start, do it all right. Get as much knowledge and information you can in the process. In fact, we tend to observe that your negotiation skills mature as you do this. Then you feel more confident to push back when you see an unfavorable term say in a lease offer, or a request for a personal guarantee that you don’t want to provide. 

Lease Offers And Deposits

Nine times out of 10 we see that the landlord is only bound when the final lease is signed by both parties. That doesn’t seem unusual, but there are problems with that. The tenant on the other side of things is bound when the lease offer is signed. So as a tenant you are committed well before the landlord.

The implication of all of that is that you’ve paid a deposit, generally one month’s deposit, but it can be more, and that can be a sizeable amount of money and that’s put at risk. When you think about this logically, if you are bound from the lease offer and the negotiations go astray along the way, the landlord can get out without any financial implication, you can’t because your deposit will most likely go to the landlord’s solicitors.

Provided the lease offer hasn’t been signed, getting that wording right at the start in the lease offer is really simple. We just amend the lease offer, send it back with the wording that both parties are going to bear their own costs, and enabling you to have the deposit returned to you in certain circumstances.

Landlord Incentives

Firstly, if you’re not getting any, why not? 

Definitely be asking the question. 

Landlord incentives are generally a contribution to the fit-out cost or the first few months of rent. Remember, it is a contribution towards either fit out or rent. It’s not an entitlement to a lump sum in your pocket. That’s not how it works. When it comes to fit out it is about paying the actual cost of your fit-out, substantiated with invoices and receipts for payment. If it is to cover a rent-free period, then you will get a period of rent abatement, where your invoiced and the rent amount is already credited so that you don’t have to pay anything, or only have to pay half rent for a period of time.

There are also a couple of things to look out for. Firstly, in almost every draft lease there are what we call incentive repayment triggers. Those triggers effectively mean that if a certain series of events occur, such as falling way behind in the rent, assignment of lease, selling your business, changing your business name and so on, you are at risk of repaying these incentives. 

Now consider that if you received an incentive of $80,000, what happens if you decide that you need to get out, are you going to have $80,000 to pay back? The answer is generally no.

In a lease, it might be called a clawback. It might be called a repayment trigger, or it won’t even have a name, so it’s hard to find. 

For one of our clients we found reference to repayment of the incentive in six to eight different spots in the draft lease, in what appeared to be randomly inserted clauses where you wouldn’t normally expect to see those clauses. The same net effect without giving it a label. A trained eye can see it, which is why you as us to review your lease.

Make sure you understand what the triggers are to repayment, and whether they suit you? Generally speaking, our advice to our clients is don’t agree to any repayments. Push back on them.

The other important part is you need to know the taxation implications of your incentives. A really important question around that is, should you own the fit-out or not? 

We have a particular client who always wants to own the fit-out and is aware of any taxation implications and asks the right questions. Others don’t mind. Either way, you do need to speak to an accountant to understand the tax and accounting implications for your business.

Again, we’re designing something for you at the start of a lease. Work out with your contractor when it’s best to receive payment, marry that up so your cash flow is freed up. Often the landlord will agree to pay the incentive in two lots, for example, 50% upon commencement of the fit-out, and 50% on commencement of trade. That’s a nice clause and can help you manage cashflow.

If negotiated before the lease offer is signed, it is possible to manage the cashflow. If not, you may have to outlay the full amount of the incentive before you get it back from the landlord. Be smart, talk to someone about how to break it down and make those contributions work for you.

What’s Going To Happen At The End Of The Lease?

It’s really important to understand that when a lease expires, firstly, unless you’ve got options to renew, then you don’t have the right to stay on. If you do stay on, you’re in a period called holding over. There is no problem being in a holding over, as long as you understand it’s a month to month tenancy, meaning the landlord only has to give you one month notice to move out. It’s not that easy for a whole business to move premises.

But the most important part about designing and understanding and really being clear at the start what your end is going to be, is what are your obligations to “make good” when you hand back the premises? 

Case Study

The client is negotiating an “as is, where is”. They’re walking in to an existing and operating business and the fit-out is already there and the tenant is entering on that basis. At the end of the lease in this draft document, it has a “bare shell” requirement. A bare shell means that you have to de-fit. Which is stripping the premises back to bare walls and floors. The previous tenant is handing over as is, where is and they are not paying a de-fit.

The landlord is getting a speedy transition from one tenant to a new tenant and rent coming in, but at the end of the lease, the landlord will still require a bare shell because it creates greater flexibility for the landlord in finding a tenant.  

That’s a big “no” for us in this scenario. We’ve said to the client, “you take it as is, where is, you leave it as is, where is, subject to making good any damage along the way that you might have caused. You clearly have to repair any damages, that’s your obligation.”

It is also important to remember that a fit-out can be incredibly expensive, particularly in a climate where there is problem getting materials and high demand for trades. Some first time tenants don’t really conceive of that. One of our clients told us they were estimating costs of $5,000 for fit out. They are not even in the ballpark. Their quote actually came back at $70,000 plus.

A de-fit can be just as expensive. We have a client with a series of pharmacies, and their de-fit is $250,000 for one pharmacy. The cost of de-fit can be the same or more than the fit-out. 

Remember, design it how you need things to happen at the end of the lease. If you are going to need to budget for an $80,000 de-fit at the end, make sure that your accountant has sat down with you and worked out how that’s going to happen, because if it is due to happens in three year, you’re going to have earned enough money to have that money set aside.

It does not matter if the landlord contributed to, or covered the cost of the fit out and owns the fit out if you are required to de-fit back to bare shell at the end of the lease. You cannot just assume that because the landlord owns the fit out they will be prepared to keep it. We have seen leases where the fit-out is stated as owned by the landlord, but it’s almost like a discretionary ownership. So they can own it if they want to at the end for a dollar, but they don’t need to. It depends on what is written in the lease.


Please read every word of these documents. As any other human being will do, you will probably be tired by page three of 47. So that’s why you need to get someone to read it for you as well. It doesn’t take away or mitigate your obligation to read the whole document, but that trained eye is really important.

As humans, when we look at the same document over and over, you tend to want to say, “Oh, well, okay, that’s about this.” You don’t look at the detail as much as you should. Well, you actually have to with leases.

Take Aways

  • Get legal advice 
  • Get accounting and taxation advice 
  • Plan for success at the start
  • Do all of your due diligence, and if you’re not sure what that means, ask 
  • Push back on terms that are not favorable to you. You don’t have to agree to them
  • Slow down
  • Incentives can have red flags with them
  • Negotiate it with vigor
  • Invest in the process from the start

Fundamentally, it’s about knowing that your lease document is the most important document for the transaction. It’s your go-to guide for whenever there’s any sort of issue that arises. You need to design it, you need to know what’s in it. You need to know your rights and responsibilities. Respect that document. Treat it with respect, and invest in the process from the start.

From the dispute perspective, hindsight is a good thing. You don’t want to end up in a dispute thinking that if you had your time again, that clause probably wouldn’t be there. Take it out now.

How can Onyx Legal help you?

If you are looking to lease premises, or you are having problems with the premises you are already in and need help, make an appointment to have a chat with Andrea.