The 5 Must Haves in Your Business Partnership Agreement

by | Apr 18, 2023 | Business Partnerships

For many people entering into a business or joint venture partnership, the only agreement they have between them is a handshake, good intentions and the firm belief that they understand and agree with each other. Unfortunately, it is not a great idea to stop there. It’s not even a matter of lack of trust, but rather coming to a clear understanding that is in writing. People mean different things even when using the same words. Once it is written it should be revisited at least once a year and can be revised if it no longer is serving you. But at least it eliminates an “I said, you said” scenario which happens frequently and with the best of intentions.

The one thing that many new partnerships overlook is the importance of discussion and real honest, transparent communication before the partnership is officially forged.  Assuming they chose each other well and are set to enjoy all of the benefits of a successful partnership would provide the next most important thing to do is to write a meaningful partnership agreement.

I suggest not using a lawyer-created agreement, which has the mindset of preparing for a breakup.  I do advocate showing this agreement to a lawyer after it is written.

The agreement more useful will be tailored specifically to the partners as individuals as well as the company and addresses all the issues of the proposed business including core values, vision, responsibilities of each, an exit strategy, and more.

A partnership agreement allows you to structure your relationship with your partner for the long haul. You and your partner will know clearly your plan because you will have discussed and written every detail.   While the hope is that you never have to take the agreement to the court, it can serve as a guide for a judge to know and support your intentions when possible and is a great tool to guide your business, from the beginning to the exit.

The 5 must-haves for your business partnership agreement.

1. Financial and other property contributions by the partners.

These should include the amount of equity or proprietary products invested by each partner, how profits and losses will be shared, and the pay and compensation of each partner. It’s critical that you and your partner work out and record who’s going to contribute cash, assets, or products and services to the business. Outline these things very specifically. Disagreements over contributions and compensation have doomed many promising businesses.

2. Restrictions of authority and expenditures.

Without an agreement that outlines the authority of each partner, any partner can bind the partnership (for example – signing a contract with a vendor or incurring debt for new equipment) without the consent of other partners. Decide how decisions about expenditures will be made and how they will be authorized.   One partner was shocked to discover that overinvesting in equipment brought the business to a financial disaster the partner was responsible for the finances.

3. Duties and responsibilities.

You would be wise to outline these duties in advance – think of it as assigning areas of responsibility. Who is in charge of accounting? Who is in charge of hiring employees and negotiating salaries? Who is in charge of vendor management? Go through the day-to-day operational needs, and make sure everything is covered. Make sure to utilize each other’s strengths. Do not, however, consider it a pass for you to not be attentive to the area of your partner’s charge.  Each partner is responsible for the big picture of the business.  Many partnerships fail due to a lack of ongoing communication about all areas of the business.

4. Dispute settlement strategy.

It is vital to have a plan to resolve stalemates. Some options used by others are a 49/51 split in the different areas of expertise, for example, the one who is most responsible for this area of your business decides. Or you may call in an expert in the field, if not actually to decide, at least to advise. A coach or mediator might be used. You can even decide to flip a coin, but make sure whatever you decide is written into your agreement. You can always change it, but have something there that you discussed, decided upon, and can use.

5. Have an exit strategy.

An exit strategy should include a Buy/Sell Agreement and address settlement due to personal injury, divorce, or death.  How assets will be distributed upon dissolution. What if one of you wants to retire and retain ownership or on the other hand be bought out? How is ownership retained by the remaining partner? Discuss every possible What IF Scenario that you can think of.

Most partnerships break up because of the relationship, not because of the operations or technology of the business.  A relationship that is not spelled out and not maintained through an ongoing conversation using skilled and respectful communication is in jeopardy.

Invest in and fortify your long-term business partnership success with the BPAT and What Ifs Scenarios.