The power of the verbal agreement form
It is now over a year since I retired from the big firm to set up my own niche forensic and litigation support practice. I was recently reflecting on the files I have been involved with over the last year or so and one significant common factor was noted. The lack of a verbal agreement form.
Back in the early 20th century, an academic writer whose name now escapes me, noted that “management intention is a notoriously unreliable basis of accounting”. It is the same for parties who have different recollections of undocumented agreements reached, often years prior and often when the parties were in different states of mind for whatever reason.
Often people are the best of buddies at the time they undertake transactions and much later things go wrong, or worse still, a party dies and the other party is dealing with an estate or family. Simply documenting what was agreed at the time can overcome these issues. Perhaps a few examples would assist in making the point.
Take a partnership situation, where the parties come together to further their business endeavours leveraging off each other for the common good. This might be in professional services such as legal, accounting, or medicine, but it might as easily be another business such as farming. The later can be especially difficult as often family are involved and as the saying goes, you can choose your friends but not your relatives!
The first area this type of business should document is the agreement on how to manage new partners entering or partners exiting the partnership. Following on from this will be how increases or reductions in partnership shares will be managed as young partners come in and older partners move towards retirement. It is no different in the family business but often it is more difficult to suggest an agreement when family is involved.
These agreements need not be long formal, legally drafted agreements but should always be made with the benefit of professional advice to the parties. Often a simple one or two page agreement with bullet points on the key matters is sufficient for the purpose but in other cases a more formal agreement is best.
Sometimes a longer full agreement with principles set out can be supplemented by an annual agreement with such variables like interest rates, or earnings multiples for valuing interests, current year expectations of each partner, and income sharing agreements for the year. An annual supplementary agreement is responsive to economic and business conditions at the time.
Many of these same provisions should be captured in closely held businesses. These are often essentially corporatised partnerships and the same issue have surfaced in my files to date.
The key point is when in business with another, you should use an appropriate verbal agreement form to capture the parties’ intentions at the time. The recollection of these intentions often change over time!
Another area where I have been consulted numerous times recently is in relationship property matters. Often it arises where couples coming together have unequal asset bases or already have trust structures in place, either for personal assets or to hold business interests. All can be fine for many years while the relationship is healthy but on break up emotions run high and the party’s recollection of the intentions at the time become clouded.
Usually, no specific legal advice had been taken at the time the relationship commencing and no “contracting out” agreement was signed. Often Trust minutes are non-existent, and usually one party has greater economic power than the other. Often one party relies totally on the other to do the right thing financially and after the relationship breaks down they feel, rightly or wrongly, that they have been financially taken advantage of.
If only they had taken the time for a verbal agreement form at the time to set out “his, hers and ours” all could have been different. Legal advice is essential at the commencement of a relationship, especially where there are existing assets.
These days it is common for parents to assist their children onto the property ladder in one way or another. Again, it is important for both the parents and the child for legal advice to be obtained and an agreement drafted to set out how the support will occur and the expectations on both parties as to the status of the monetary support provided and the arrangements, if any, for the repayment.
Still, I shouldn’t be too keen on promoting the verbal agreement form as then I might have time to improve my golf handicap!
Graeme is a Certified Fraud Examiner and forensic accountant at McGlinn Consulting Group Limited. He has over 35 years experience in accounting, auditing and litigation support in New Zealand and overseas. He can be contacted via his website www.mcglinnconsulting.com or by email at firstname.lastname@example.org