A guide to structure, capital, valuation, equity for key staff and the shareholders agreement.
Bringing another shareholder into a construction business changes how the business is owned, how decisions are made and how profit is shared. This article covers four situations: setting up a business with room for future shareholders, two people starting a business together, an established business taking on a partner, and offering equity to a key staff member.
An ownership arrangement is more likely to work when the people involved have written down what each of them expects before a lawyer is briefed, and when the business produces financial reports that everyone involved can rely on.
This article is general information only and does not take your circumstances into account. Changing the ownership of a business has legal, tax and commercial consequences that differ from one business to the next, so it is important to get advice from a qualified professional before making any decisions.
A company is generally the most flexible vehicle for bringing in shareholders later, because a company can issue new shares and can have more than one shareholder and more than one director. Adding an owner to a trust or a unit trust is more complicated, and in Queensland the Queensland Building and Construction Commission (QBCC) minimum financial requirements (similar in other states too) mean the licensed building entity is rarely a trust in any case. It is worth planning for the eventual exit when the structure is first set up, whether that exit is a full sale, a partial sale or bringing someone new in.
Construction partnerships often begin with conversations that run for 12 to 18 months before anything is agreed. A good next step is to turn those conversations into a heads of agreement, which is a written discussion document setting out why the parties are coming together, what each of them is contributing and how each of them will be paid. Most shareholder disputes trace back to expectations about contributions and roles that were never discussed, so a written heads of agreement gives both parties a shared record to refer to later. A heads of agreement is a good place to start, because it puts everyone’s interests and the key matters on the table for discussion early. It is not the finish line: a full shareholders agreement, drafted by a lawyer, is where the arrangement really needs to land.
Construction businesses need working capital from the first day to mobilise jobs, and builders doing domestic work also need capital to meet home warranty insurance requirements. In a 50/50 arrangement, each partner usually contributes an equal amount to buy their shares. A partner who contributes more than that amount can lend the extra money to the company, which repays the loan from surplus funds, so the agreed ownership split stays intact.
When an established business takes on a new shareholder, the business has to be valued so the price of the shares can be set. In construction, the value usually depends on the quality of the pipeline, the maturity of the business’s systems and the strength of its key people, together with what the incoming party adds.
Offering equity to a key staff member has become a more common conversation because high-quality talent in construction are hard to find and keep. Whilst offering equity as part of a strategy for retaining key staff may be a good pathway, it’s important not to make the assumption that this is what all employees want – they prefer a salary and a bonus without the obligations of ownership. The first step is a direct conversation with the employee about what they want, and what are their long term goals – and ultimateliy working out what will motivate them to stay. Equity also changes the employee’s responsibilities, because a bonus is typically tied to gross profit on jobs, while a shareholder shares in net profit, carries responsibility for the balance sheet and may be asked to sign personal guarantees.
For owners, the larger adjustment is often giving up control. Disputes often follow when an owner continues to treat a new 10% shareholder as an employee, so equity arrangements are more likely to work where the owner’s behaviour after the transaction reflects the ownership that has been granted.
Under Australia’s employee share scheme rules, shares issued to an employee for less than their market value, including shares given for nothing, are treated as issued at a discount, and the discount can be taxable income for the employee. A decision to give a long-serving employee 5% of the company therefore needs a valuation first. The rules contain concessions and exceptions that can change the outcome, and issued shares are difficult to take back, so the tax structure needs to be settled before any shares change hands.
Ordinary shares carry voting rights and a share of all profit and capital. There are four common alternatives:
Dividend share classes are complex to set up and need specific advice. Moving part of a business into a new company is a restructure that can carry stamp duty and licensing consequences. All of this needs to be properly assess with an advisor before any restructure goes ahead.
A shareholders agreement is the legal document that formalises the arrangement betwreen all parties and sets out the process and settings for how key matters are dealt with. It’s important to engage an experienced lawyer for this work, and that they draft the agreement for the specific business rather than adapt a generic template.
The heads of agreement serves as the lawyer’s brief, which reduces the time spent working out commercial terms at hourly rates. A good shareholders agreement typically covers the following matters:
Dividend expectations also belong in the agreement, because construction companies may need to retain profit for equipment or to meet QBCC minimum financial requirements. Where there is no shareholders agreement, the company’s standard constitution generally governs shareholder matters, and many owners have not read the constitution their company adopted.
A person buying in needs to see how profit has been calculated, and an employee working toward milestones needs to know whether those milestones have been met, so both depend on consistent monthly management reports. Where a job management system such as Buildxact or WunderBuild shows a different gross profit from Xero, the business needs to reconcile the two figures and agree which figure governs before any incentive starts. It is also worth holding a session with an independent adviser, the owner and the incoming shareholder to work through the financials before anyone signs.
AI tools such as Claude or ChatGPT can help build a heads of agreement and raise questions the parties had not considered, but that the shareholders agreement itself needs a lawyer working with the full commercial context.
Ownership changes often take six to eighteen months from the first conversation to a signed agreement, so starting the conversation early leaves time to settle the valuation, the tax structure and the terms of the shareholders agreement. Taking your time with this process also allows each party the time they need to make an informed decision.
Xact’s Advisory division works with owners on roles, incentive schemes and strategy, and the Compliance division works through share structures, valuation and tax. If you are considering bringing a partner or a key staff member into your business, we can work through the options with you and help you prepare the heads of agreement before the lawyers are involved.
Thinking about bringing someone into your business? Book a consultation with Xact and we will talk through the options that suit your situation.
**This article contains general information only and does not take your circumstances into account. Advice specific to your business should be obtained before acting on any of the matters discussed.
