Have Chris Reich of TeachU Help Create Your Perfect Partnership Agreement
If You Are in a Business Partnership, Get This Done Before It’s Too Late
I am a business partnership mediator. Every day partners come to me to help settle disputes or to reduce tension. The first question I have is, “Do you have a Partnership Agreement?” Of 100 business partnerships, 10 will have a Partnership Agreement. Of those 10, few will be of much value when trouble arises. If you follow some basic advice, your Partnership Agreement could save your business someday.
Why You Need a Partnership Agreement
Fair question. Some Partnership Agreements are so vague they serve little purpose when they are needed most. A well-crafted Partnership Agreement helps with processes when disagreement arise over vision, the number cause of conflict, and money, the second leading cause. Your Partnership Agreement should also cover precisely (key word) how significant disruptive life events are handled. Let’s look at what needs to be in your Partnership Agreement to avoid problems in the future.
When Your Partnership Agreement Is Needed, It must Do 2 Things
- There must be terms that the business or the partners can bear.
For example, if a partner dies, can the surviving partner handle paying the deceased partner’s estate? I saw a Partnership Agreement that specified that a surviving partner would pay the estate of the deceased $2.5 Million. Okay, but the business was only worth about $200,000 at the time. That payout was based on the business’ potential value if things went well over 10 years. I was familiar with this business for 3 years and it lost money each of those years. How would the survivor pay $2.5 MILLION dollars???? Regardless of the circumstance, the terms should not bankrupt the business. That means clear definition is needed.
- You want to avoid ending up with an unwanted partner. If your partner dies, does his wife become your new partner? The wife who always said that you never gave her husband the proper respect? Or does his son, the one just out of rehab get his share because it’s stated so in his will? This stuff happens every day. I worked on case last year where half of a business went to an uncle who was completely awful to the surviving partner.
Few Partnership Agreement take these 2 big items into specific and proper consideration. Sure, they are often mentioned but not with the specificity to protect the business. I see things like “first right of refusal”. Well, OK, you can refuse to sell to the uncle from the underworld but then what? How do you satisfy the estate?
And clauses that say, “the value will be established by a professional business appraisal.” Great. Do you think parties in conflict will agree on the outcome of a single appraisal? Who picks the appraiser? I saw that clause in the Partnership Agreement for a small nail salon. Do you know what it costs to do a full forensic audit to develop that appraisal? It could cost $20,000 to appraise a business worth $30,000!
There are ways to address these issues.
Most Partnership Agreements Are Missing BIG Pieces
At minimum, your Partnership Agreement should clearly define:
- How are disputes over money decided? (One wants a raise, the other wants to buy a new company truck)
- How are big decisions decided when partners disagree? 2 Biggest business partnership killers are:
- Differences in vision for the company
- How are new agreements and policies decided, adopted, recorded, and enforced at the business?
- How can a partner leave the business voluntarily? (How to sell your share)
- What if a partner becomes disabled?
- What if a partner abandons the business?
- What if a partner dies?
These must all be clearly addressed and the options are limitless. I’m often asked, “what can we do in these circumstances?” The answer is simple: You can do anything you and your partner(s) agree. (Stay legal, of course)
If you don’t have a Partnership Agreement, get one in place as soon as possible.
I offer a service to prevent needing my primary service. I can help you develop a good Partnership Agreement so that you never need mediation. I walk through the items you need and help you decide how you want to handle each item. We’ll protect the business and the partners. You’ll get options to handle the circumstances that kill partnerships and you and your partner(s) can decide exactly how you’d like each clause. When we’re done, I’ll draft the items for you to present to your attorney. Your business attorney will then put the necessary legal wording into a proper Partnership Agreement meeting the laws in your state.
From this, you get a much more thorough agreement and it will be very specific to your exact wishes. This takes time and at $500-and up per hour can be very expensive. My rates are far less than a business attorney and because of my mediation experience, I know what needs to be nailed down.
This is a money-saving process for you and a way to meet new people for me. Win-Win.
And, for partners in my LinkedIn network I provide a sizeable discount. If we’re connected, you get a discount and priority service. (Go to LinkedIn and connect!)
I do not pass ANY work off to associates. You work directly with me. 100% confidential. If interested, please contact me for further details.
Have a great year and thank you for reading this.
Chris Reich, Business Mediator
Game Theory is a very useful tool in business negotiations. In this post, I’ll give a broad overview on how Game Theory can help you negotiate your best deal with your business partner.
I get calls from frustrated business partners all the time. Often, the level of tension is so high, that one partner will move the banking, hide the books, take out a lump sum of cash, close out all social media, or some other drastic measure before properly closing out the partnership. This post explains when it is legal to take action in a partnership when a partner is disruptive.
Partners in a business partnership, other than limited partners, have legal obligations to the partnership that are called the Fiduciary Partnership Duties. In this post, we’ll look at these duties and, hopefully, clarify what they mean.