I’ve coached a lot of businesses over the years and a good number have had partners. Some have worked out very well, and some, well, haven’t been so great. What I believe as an experienced business coach is that it’s important to have agreements, whether that be client agreements, employment agreements or, in this case, partnership agreements. In most cases, it means we are clear about the ‘rules of engagement’, what is expected and what we can expect from the partnership. In this blog, I’m going to cover the benefits of a partnership agreement, what could potentially go wrong if you don’t have one and potentially some of the things which should be included.
A partnership is a good option at times, especially if you are able to share costs, group expertise or skills and as a whole, represent a larger force or operation as a business. Different partners can bring skills, finances, opportunities, connections, expertise and much more, so in many instances it can make for a much stronger business overall.
I strongly encourage you to talk to your solicitor in respect of preparation of your agreement. I’m not a solicitor and this is not legal advice; it’s purely about getting you thinking and appreciating the importance of having a partnership agreement.
Why It’s Beneficial To Have A Written Agreement Between Business Partners
- Keeps things fair and equitable
- To be clear about all partners’ roles, duties and responsibilities – everyone knows the ‘rules’ and therefore it’s easy for everyone to abide by those rules and play the game ‘nicely’
- Sets out how business decisions will be made
- Helps to protect each partner’s business investment
- Helps to avoid legal action
- Unless specified otherwise, it ensures all partners are equal including how profits (or losses) are shared
- Assists in dealing with life changes of the partners – eg divorce or marriage
- Avoids minor disputes; everyone knows up front how things will be done
- It’s easier to agree on important issues in advance, before they become an issue
- It allows partners to focus more on the business; and less on the partnership
- Potentially allows for the removal of a disruptive or non-performing partner.
What Can Go Wrong If You Don’t Have A Written Partnership Agreement
- If there is no written partnership agreement, it is presumed that profits (and losses) will be shared equally. To draw a salary, it’s advised to have that reflected in the partnership agreement.
- In the event of the death of a partner, if you don’t have a written agreement, the state law will have the right to manage the future of your business – regardless of your wishes.
- The business can suffer without goals, and the responsibilities and expectations from each partner is not clear.
- Without an agreement or a plan on how disagreements or misunderstandings will be handled, they can blow up into a full-on disaster. A lot of angst, ill-will and anger can occur, as usually when something comes up, it’s at the worst possible time. If you cannot agree on the fundamentals in advance, before the business starts, then you’ve time to withdraw if you’re not on the same page. After the business is operational it makes it harder to ‘pull the pin’.
What Are Some Of The Items Which Should Be Included In A Partner’s Agreement
- All the legal stuff, like the name and location of the partnership, partners etc.
- What the purpose of the business is.
- How decisions are made. If you’ve an odd number of partners, this can be easier, but otherwise, what is the process if there is no agreement?
- What wages or salaries can be drawn, what money is contributed to the partnership and how/when that will be repaid. Will partnership capital injections earn interest, or need to be repaid before other partners draw out money?
- How will disputes (either within the partnership or generally around the business) be handled?
- How will losses be distributed? A loss distribution actually has a value, and particularly if one partner has put in a larger portion of the capital, will they proportionally get back a similar portion of the losses, or based on their normal equity within the partnership?
- Management duties should be included, and expectations of same.
- If there is a larger number of partnerships, more than just a couple, will you have a ‘managing partner’ – how are they selected and how long will they hold that role?
- What are the limitation in respect of spending? Could one of the partners go out and buy a Lamborghini under finance within the partnership?
- How will partners, or the partnership which terminated, withdraw? How will a death (or divorce) of a partner be handled?
- What about adding a new or additional partner? How will that be done?
- Partners’ authority.If you do not have an agreement to state otherwise, then any of the partners can act without consent of the other. For example, if partners choose to employ family, or friends or pay their life partners a huge salary, how is that handled, before it even happens?
- If the business needs to be dissolved; how will that occur?
This is just the tip of the iceberg and given that partnership law is a whole category in its own right, I am sure there is much more that I’ve not mentioned. Which is why, as I said at the beginning, you need to have a signed and legally drawn-up partnership agreement. I do recommend that before you go see a solicitor, that all partners have these discussions first and agree on the fundamentals. If you can’t agree initially, perhaps it’s wise to reconsider if a partnership is the best course of action?
A partnership agreement is a little bit like insurance. Everything is fine when you don’t need it, and you’ll probably not miss it terribly whilst everything is sunshine and roses. But when you do need it, that’s when you’ll appreciate its value, or kick yourself that you don’t have it. Everything is often all ok – until it’s not.
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