How to Create a Business Partnership Agreement

Developing your Partnership Agreement should be the first step in forming a new business with a partner. If you haven’t created a Partnership Agreement yet, it’s not too late. If you need help, I offer a process to help create the document at a fraction of the cost. (Chris@TeachU.com)

Your Partnership Agreement and What Should It Include

A well-crafted Partnership Agreement can save a lot of expense, tension, and grief. When the significant issues arise, and they will, having a set of rules that govern various situations removes the stress of having to negotiate every situation. The Partnership Agreement sets out the steps you’ll follow when things come up that require special consideration like a big purchasing decision.

Your Partnership Agreement should be a flexible document that is reviewed and revised as your business grows. Let’s look at what to include and how to get the best possible agreement at a big savings.

Avoid Online Templates

There are many reasons to avoid the online templates. First, they may not address the critical points needed in your partnership. Further, they may not be properly drafted for your state. It’s better to work with a professional to develop your agreement. I help my clients think through the provisions that suit their situation and then since we’ve already spent the “thinking” time, we can have a lawyer draft the document using your terms.

What to Include in a Good Partnership Agreement 

Every situation and business is different. Some partnerships might need more provisions than others. In general, you’ll want to include these items in the level of detail demanded by your partnership relationship.

Decision Making

Will both partners participate in all decisions? That isn’t practical. You’re ordering toner for the printer. Should you stick with a brand name or try an off-brand toner that is a lot cheaper? Must you call a partnership meeting? No.

Maybe you set a financial limit of decisions to be made individually or by all partners. Should you move the business to the larger building which will increase the rent by $10,000 a month? That’s a decision for all partners.

So maybe you agree that decisions over $5,000 need partnership approval. If there are more than two partners, is a 2/3 vote sufficient or must big decisions be unanimous? Or, do you designate a partner to be CEO for a term of 5 years and make that partner responsible for all the decisions? You want to talk about and agree on how big decisions, especially about money are made.

When More Money is Needed

What if the business runs low on cash? Include a provision that defines how money will be added and if that affects equity.

Define When Partners Get Paid

Partner pay is a big issue that fractures many business partnerships. Decide in advance when partners will take money and how money is to be distributed. There is nothing wrong with a partner making more money than the other partner or partners if one partner is doing the work while the other provides support.

The Ugly Reality of Death, Disability, Desire to Leave, Dissolution

We don’t like to enter an important relationship governed by a contract that defines what happens when things fall apart. But there is a reality to life. Stuff happens. 

I always tell my clients to protect your business from 2 items. You don’t want an unexpected new partner. You don’t want to bankrupt the business trying to cover a buyout if a partner wants to leave and try something more fun.

Here’s where most of the templates break down. If your partner dies, most templates say that the business has a couple of months to pay off the value to the deceased estate. That value is determined by an appraisal. This is a weak and dangerous way to handle a partner’s death. For one, getting people to agree on an appraised value is almost impossible. If that agreement is reached, where will the money come from to accomplish the buyout? If you can’t cover the buyout, does your former partner’s son become your new partner?

Think about what you would do if you got injured and couldn’t work. Can your partner remove you from the business because you are unable to contribute? It happens.

What if your partner decides to move to India to explore her higher self? Must you write a buyout check because your partner chooses to leave? Can your partner sell her interest to a third party? That could be possible if there is no governing agreement! People call me every week when they find out they have a new partner that they do not like.

My Process Helps You Develop a Partnership Agreement

I have a flat rate process to help partners think through the provisions they need for their agreement. Everybody is a little different. The way it works is that we schedule time for a somewhat long meeting. We’ll need 4-8 hours depending on how easy it is to reach agreements. I guide you through the various provisions and offers ideas for how to structure your partnership. You and your partners make all the decisions.

When done with the meeting, I draft an MOU (Memo of Understanding) that states all the agreements reached. That can go to your attorney for final drafting. I can work with your attorney to save you money by answering the questions and guiding the final document toward what you and your partner(s) intended at the partnership meeting. This typically saves about $3,000 and the end product is a great document.

Having a solid Partnership Agreement is foundational protection for your rights as a partner. Getting it done properly could someday save your business.

Chris Reich, Business Partnership Mediator

Chris@TeachU.com

(530) 467-5690

“If you are starting a new partnership, please get a Partnership Agreement in place. If you are in a partnership and don’t have a Partnership Agreement, protect yourself and get one. I’ll take you through a process that will save you money.”