Related Party Arrangements

What are Related Party Arrangements?

Agreements between the company and parties that are related entities but not within the corporate group such as shareholders, shareholders' families, directors and employees or entities controlled by these parties.

Gaining sufficient clarity on related party transactions and managing them going forward includes:

• Tracking the agreements and transactions
• Tracking their key terms
• Ensuring their impact has been removed when assessing the performance of the business either through ensuring all terms are on an arms length basis or by making adjustments to reported results to reverse-out their impact
• Understanding what exposure the core business has to these third-parties going forward

Why are Related Party Arrangements important for business today?

Undertaking a thorough review of related party arrangements and documenting them in a formal way provides a number of benefits to the business:

• It enables a fair and accurate assessment of the heath and performance of the business
• It provides a mechanism for ensuring all dealings are priced on an arms-length basis
• It enables easier compliance with any relevant regulations related to related party dealings

Why are Related Party Arrangements important for an event tomorrow?

There are a number of reasons for related party transactions and arrangements to be particularly important to investor groups during a deal process:

• Without addressing them, it is difficult to accurately assess the business. Related party transactions or arrangements can cloud the true performance of the underlying business and therefore need to be identified and removed.
• Identifying them allows parties involved in a transaction to plan for and carry-out the unwinding of these arrangements if necessary.
• Identifying any situations where a new service provider may be required to replace the related party is very important for investors, particularly where those market terms would be significantly different from the related party terms. Once identified, these variances then need to be captured in the assessment of value.
• It is also important to identify any related party arrangements that are critical to the ongoing health of the business, where no third-party exists to provide a similar product or service on similar terms, and then develop plans to mitigate this risk, either through price adjustment or long term contracting.
• It is important to assess the potential for any legacy liability, or any ongoing exposure, to related parties for new investors.

Pros of addressing Related Party Arrangements

• Improved clarity on business performance
• Helps ensure terms are market standard
• Facilitates regulatory compliance

Cons of not addressing this topic

• Potentially allows unintended liabilities to third-parties to arise in the future
• Business decisions can be made based on an inaccurate assessment of the health of the business
• Regulatory compliance may be in jeopardy