Business Agreements in South Africa: What Does Your Business Need in Place?
Running a business involves agreements at almost every stage, whether you are dealing with shareholders, business partners, landlords, tenants, lenders, suppliers or purchasing assets.
However, having an agreement in place is only part of the picture. It is equally important to understand what you are agreeing to, which clauses could expose your business to risk, and whether the agreement properly protects your interests.
At My Finance Partner, we help businesses understand the financial and commercial implications of their agreements, identify areas that require attention and make more informed business decisions.
What Agreements Should Your Business Have in Place?
The agreements your business needs will depend on its structure, operations and commercial relationships. However, there are several important documents that business owners should consider.
1. Memorandum of Incorporation (MOI)
A Memorandum of Incorporation, commonly referred to as an MOI, is a key document for a South African company. It sets out the rules governing the company and establishes the rights, powers and responsibilities of its shareholders and directors.
Business owners should understand what their MOI provides for, particularly around decision-making, voting rights and the respective powers and responsibilities of those involved in the company.
It is also important to ensure that the MOI aligns with any shareholders’ agreement and that the two documents work together effectively.
2. Shareholders’ Agreements
When two or more people are in business together, it is important to clearly define how the relationship will work and how key decisions will be made.
A shareholders' agreement can address matters such as ownership, responsibilities, decision-making, profit distributions, funding and capital contributions, share transfers, and what happens if one person wants to leave the business.
It is also important to consider how disagreements will be resolved and what happens to a person's shares in the business in the event of resignation, retirement, death or another significant change.
3. Lease Agreements from a Tenant's Perspective
A commercial lease can create significant long-term financial commitments for a business, so it is important to understand the full cost and implications before signing.
As a tenant, consider more than just the monthly rental. Pay close attention to the lease period, annual escalations, deposits, renewal terms, additional costs, and any guarantees or sureties required.
It is also important to establish who is responsible for repairs and maintenance, utilities, insurance and leasehold improvements, particularly where significant alterations are needed to make the premises suitable for your business.
4. Lease Agreements from a Lessor's Perspective
For property owners and lessors, a lease should clearly define the tenant’s obligations while protecting the owner’s interests.
Important considerations include rental and escalation terms, deposits, maintenance responsibilities, permitted use of the property, insurance requirements, indemnities and liability, leasehold improvements, subletting, default provisions, and the terms governing the expiry or cancellation of the lease.
A lessor should also understand the nature and extent of any personal guarantees or sureties provided as security for the tenant’s obligations.
5. Overdraft and Other Business Finance Facilities
An overdraft or other business finance facility can provide valuable working capital, but it also creates financial obligations that need to be clearly understood.
Pay close attention to the interest and repayment terms, fees, security requirements, review periods and the circumstances under which the facility can be reduced, suspended or withdrawn.
Where directors, shareholders or other individuals are required to provide personal surety, they should understand the potential personal financial implications before signing.
6. Asset Purchase and Finance Agreements
Purchasing or financing vehicles, machinery, equipment and other business assets can involve significant financial commitments.
Whether the arrangement is an instalment sale, finance lease or another form of asset finance, businesses should consider the repayment period, interest and fees, ownership of the asset, early settlement terms, insurance requirements, and what happens if payments cannot be made.
Understanding the total financial commitment, rather than focusing only on the monthly instalment, can help businesses make more informed purchasing and cash flow decisions.
Clauses You Should Pay Attention To
It can be tempting to focus on the headline figures in an agreement and overlook the finer details. However, certain clauses can have significant financial and operational consequences.
Some important areas to consider include:
Agreement and lease terms: How long are you committed and under what circumstances can the agreement be ended early and what are the financial implications?
Renewal dates: Does the agreement renew automatically? How much notice is required if you do not want to renew?
Deposits: How much is required, where is it held and under what circumstances could you lose all or part of it?
Repayment terms: What are the repayment amounts, interest rates, fees and consequences of late or missed payments?
Repairs and maintenance: Who is responsible for maintaining or repairing the property, equipment or assets?
Leasehold improvements: Who pays for improvements to leased premises, who owns those improvements and what happens to them when the lease ends?
Sureties and guarantees: Are you or another person providing personal security for the business's obligations? Understand exactly what you could become personally liable for.
Restraint of trade: Does the agreement restrict where, when or how you can conduct business after the relationship ends?
Termination clauses: Under what circumstances can either party terminate the agreement, and what notice is required?
Default clauses: What happens if one party does not meet its obligations?
Escalations and increases: Are there automatic annual increases or other cost adjustments that need to be factored into future cash flow?
Dispute resolution: How will disagreements be dealt with if the parties cannot resolve the matter themselves?
Do Not Just Sign. Understand What You Are Agreeing To.
Business agreements can have a significant impact on your finances, cash flow and future flexibility.
Before entering into an agreement, it is important to understand both the immediate commitment and the longer-term implications. A clause that appears insignificant today could become important if your circumstances change, the relationship breaks down or your business needs to exit the agreement.
This is where professional guidance can add real value - helping you understand the financial implications, identify potential risks and ask the right questions before you commit.
How My Finance Partner Can Help
My Finance Partner works with business owners to help them understand the commercial and financial implications of important business agreements.
Whether you are considering a new lease, reviewing finance options, entering into an agreement with business partners or making a significant asset purchase, we can help you identify the areas that require attention and understand how the agreement may affect your business.
Having the right agreements in place, and understanding the clauses within them, can help you make informed decisions, manage risk and avoid unexpected financial consequences.
Before signing your next major business agreement, make sure you understand exactly what you are committing to.
Visit www.mfpartner.co.za to learn more about how My Finance Partner can support your business.
Comments