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What to Look for in a Partnership Agreement

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What to Look for in a Partnership Agreement

Business partnerships are often likened to marriages, but with such a high number of marriages ending in divorce, should we be looking more closely at the similarities to avoid the same fate in business?

Having just celebrated another wedding anniversary, hubby and I have reflected on the various challenges we’ve faced along the way. In the lead up to our marriage many years ago, the Minister performing the ceremony visited our home over six consecutive weeks to talk about a range of issues central to a long and happy relationship. There were no right or wrong answers in the topics he chose; they just prompted us to discuss issues we may not have considered.

Like lots of partnerships, things arise down the track that neither party thought to discuss in the early days. And they might reveal attitudes or experiences neither knew existed. Depending on the terms that founded the partnership, these unforeseen events can either make or break an otherwise solid relationship.

At the very least, it’s naïve to think that a relationship spanning 20 years has not undergone ‘change’ along the way. That means that the business partnership you form today is unlikely to have the same dynamics years from now, so be wise and prepare.

No matter how much trust and mutual respect exists in a relationship, planning is still used to provide a comfortable degree of certainty. Even marriages might use counselling, prenuptial agreements, insurances, wills or family meetings to sustain a healthy partnership, not just for themselves, but for those they impact upon.

In business, any decision to enter a partnership should do the same. In fact, it’s negligent to think otherwise. Along with updated wills, partnership insurance and life insurance, a solid partnership agreement can provide the foundation that will help your relationship ride out many inevitable storms.

A professional will help you cover issues specific to your relationship, but at the very least, a partnership agreement should cover the following.

Ownership.

A partnership might simply be on a 50/50 basis, or it might depend on how much each partner has contributed to the business.

Roles and responsibilities.

In some partnerships, one or more partners may invest money but have no day to day responsibilities of running the business. What expectations do you have of your partner? This could include anything from being in the office during core work hours or just attending monthly meetings. It’s also an opportunity to discuss conditions such as annual leave, sick leave and any other entitlements that may or may not apply.

Profits and loss.

If not shared 50/50, how is liability to be split? How and when are profits to be drawn? Can partners draw on funds in advance? Is priority to be given to any particular debt or loan before profits are disbursed to partners?

Goals and objectives.

All partners must understand the scope of the business and agree on the core values that underpin major decisions and the general direction of the enterprise. This isn’t difficult when the partnership is a new venture, but if partners are added after the business has commenced, it can be overlooked.

Authority.

Who can make decisions? What types of decisions (if any) require the agreement of all partners? Do those individuals have authority to access bank accounts and employee information? What information (if any) is not to be accessed?

Dispute resolution.

How will disputes be settled? What types of disputes will require mediation?

Winding up.

This can either be planned or the result of an unforeseen event such as the death or incapacity of a partner, or insolvency. Are mechanisms in place to allow one partner to buy out the other? Is the business expected to operate indefinitely or is there a fixed end date?

If this seems too formal, or you’re embarrassed about raising the need for an agreement in case your partner interprets it as a lack of trust, that should be a warning that your partnership is not on the same page to begin with.

Consider everyone who’ll be impacted by problems in your partnership. It’s not only your family but your employees, clients, creditors and other stakeholders who are affected by the risks you take. Business comes with formality, so don’t be coy about insisting on one that will ultimately benefit you both.

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