People who call me for help with their business partnership never have a Partnership Agreement in place. That probably means that having a Partnership Agreement helps partners avoid problems. Determining legal distribution of ownership in the event of sale of the business can be a very serious and expensive problem.

Who Owns How Much of Your Business?

How would you allocate ownership if you are the judge in these cases?

Scenario 1

Two people show up in court fighting over the proceeds from the recent cash sale of their small business. Let’s call them Bob and Alice. There is no Partnership Agreement. Bob and Alice started the business, a pool cleaning service, exactly 2 years ago. They each put $15,000 cash into a business bank account. With the $30,000, they bought some pool cleaning equipment, pool supplies, and a very used van.

They provided great service and were willing to do quick jobs with no notice at a premium charge. People who planned a party and wanted a pristine pool and spa could have the best service right before the guests arrive. The business thrived. Both partners took salaries of $5,000/mo. over the entire life of the business.

Bob and Alice start arguing over the future direction of the business and can never come to agreement. They decide to list the business with an agent. To their surprise, the business sells for $90,000. Because of great management, the business has no debt. The selling agent gets a 10% commission leaving $80,000.

How would you allocate the money?

Scenario 2

Two people show up in court fighting over the proceeds from the recent cash sale of their small business. Let’s call them Bob and Alice. They are romantic partners but NOT living together. There is no Partnership Agreement. Bob and Alice started the business, a pool cleaning service, exactly 2 years ago. Bob put $30,000 cash into a business bank account. With the $30,000, they bought some pool cleaning equipment, pool supplies, and a very used van.

They provided great service and were willing to do quick jobs with no notice at a premium charge. People who planned a party and wanted a pristine pool and spa could have the best service right before the guests arrive. The business thrived. Both partners took salaries of $5,000/mo. over the entire life of the business.

Bob and Alice start arguing over the future direction of the business and can never come to agreement. They decide to list the business with an agent. To their surprise, the business sells for $90,000. Because of great management, the business has no debt. The selling agent gets a 10% commission leaving $80,000.

How would you allocate the money?

Scenario 3

Two people show up in court fighting over the proceeds from the recent cash sale of their small business. Let’s call them Bob and Alice. They are romantic partners living together. There is no Partnership Agreement. Bob and Alice started the business, a pool cleaning service, exactly 2 years ago. Bob put $30,000 cash into a business bank account. With the $30,000, they bought some pool cleaning equipment, pool supplies, and a very used van.

They provided great service and were willing to do quick jobs with no notice at a premium charge. People who planned a party and wanted a pristine pool and spa could have the best service right before the guests arrive. The business thrived. Both partners took salaries of $5,000/mo over the entire life of the business.

Bob and Alice start arguing over the future direction of the business and can never come to agreement. They decide to list the business with an agent. To their surprise, the business sells for $90,000. Because of great management, the business has no debt. The selling agent gets a 10% commission leaving $80,000. Bob insists that his initial $30,000 be paid back first and then the remaining amount split evenly. Alice says, no deal. She says the money should be split evenly and that Bob gets his money back from his share of the proceeds.

How would you allocate the money?

Scenario 4

Two people show up in court fighting over the proceeds from the recent cash sale of their small business. Let’s call them Bob and Alice. They are romantic partners living together. There is no Partnership Agreement. Bob and Alice started the business, a pool cleaning service, exactly 2 years ago. Bob put $30,000 cash, which he raised by taking cash advances on 3 of his (his only) credit cards into a business bank account. With the $30,000, they bought some pool cleaning equipment, pool supplies, and a very used van.

They provided great service and were willing to do quick jobs with no notice at a premium charge. People who planned a party and wanted a pristine pool and spa could have the best service right before the guests arrive. The business thrived. Both partners took salaries of $5,000/mo over the entire life of the business.

Bob and Alice start arguing over the future direction of the business and can never come to agreement. They decide to list the business with an agent. To their surprise, the business sells for $90,000. Because of great management, the business has no debt. The selling agent gets a 10% commission leaving $80,000. Bob insists that his initial $30,000 be paid back first and then the remaining amount split evenly. Alice says, no deal. She says the money should be split evenly and that Bob gets his money back from his share of the proceeds. Bob counters by saying that Alice is not a 50% partner. She is a 10% partner. Bob put up 100% of the startup money and, luckily, neither of them ever worked for nothing. Bob contends that he wanted Alice to have a small part of ownership, 10%, so she would work hard and stick around. After all, she gets paid well and gets 10% of the profits without having to put up any money.

How would you allocate the money?

Scenario 5

Two people show up in court fighting over the proceeds from the recent cash sale of their small business. Let’s call them Bob and Alice. They are school chums. There is no Partnership Agreement. Bob and Alice started the business, a pool cleaning service, exactly 2 years ago. Bob put $15,000 cash into a business bank account. Alice allowed the bank to place a $15,000 lien on her condo to secure a line of credit in the amount of $15,000 for the business. With the $30,000, they bought some pool cleaning equipment, pool supplies, and a very used van.
They provided great service and were willing to do quick jobs with no notice at a premium charge. People who planned a party and wanted a pristine pool and spa could have the best service right before the guests arrive. The business thrived. Both partners took salaries of $5,000/mo over the entire life of the business.

Bob and Alice start arguing over the future direction of the business and can never come to agreement. They decide to list the business with an agent. To their surprise, the business sells for $90,000. Because of great management, the business has no debt. The credit line has no balance. (The lien is still in place in case the credit line is used) The selling agent gets a 10% commission leaving $80,000. Bob insists that his initial $15,000 be paid back first and then the remaining amount split evenly. Alice says, no deal. She says the money should be split evenly and that Bob gets his money back from his share of the proceeds. Bob counters by saying that Alice is not a 50% partner. She is a 40% partner. Bob put up 100% of the startup money and, luckily, neither of them ever worked for nothing. Bob contends that he wanted Alice to have a small part of ownership, 40%, so she would work hard and stick around. After all, she gets paid well and gets 40% of the profits without having to put up any real money. The lien will come off of her condo. Alice contends that the money that paid the credit line came from the business, which is both of them. And yet, the $15,000 that Bob puts up should come from the proceeds? Why? How do we decide the issue of ownership? Is the security on $15,000 worth the same as Bob’s cash?

How would you allocate the money?

Other Scenarios

There are many other variations on this same set of starting problems. What if one partner never takes a salary because the business cannot support 2 full salaries? What if one partner puts up all the money and the other works for no salary for the entire 2 years?

This is a simple model and yet there are a million possible ways this can end up in dispute. I’ve seen all of these in the past year and continue to see variations of this same dispute. There are cases like this with a lot of money at stake.

When I get the call, it’s my task to help people reach a reasonable agreement so they can avoid the high cost of litigating. Fight this out in court and legal fees can easily get up to $50,000. And, it’s not uncommon for cases like this to take 5 years to conclude. I can generally get the parties to talk it through and reach a peaceful agreement.

My preferred case is the one where I get the call before the tension starts. Parts see a potential for legal problems and ask for help with a Partnership Agreement BEFORE there is a disagreement between the partners. Once all the terms are defined, if the parties decide later to sell the business, it is a much easier and less stressful event.

If you are in a business partnership and you don’t have a Business Partnership Agreement, please call me. I have a guided process that can get a good document in place at a fraction of the cost of just hiring an attorney. Working with all partners, I’ll guide you toward a framework that addresses the issues in the scenarios above.

Do Not Use a FREE Partnership Agreement Template

No, I’m not anti-free. But as you consider the scenarios above and the endless combinations we can still explore, you must see that no ‘one-size-fits-all’ document can address all those nasty combinations.

You can still save a lot of money. But, should a dispute ever break out, your Partnership Agreement will be worth thousands of dollars. Not only can we get the ownership squared away, we can define how money is spent, responsibilities of partners, compensation of partners, accidental death of partners, all the other terms and conditions that are part of a good Partnership Agreement.

If you’re reading this, you’re smart and in luck. Call for a free consultation and find out how to get a Partnership Agreement drafted for a fraction of the cost without cutting necessary legal corners.

Chris Reich, Business Partnership Consultant
(530) 467-5690

“As you consider the scenarios above and the endless combinations we can still explore, you must see that no ‘one-size-fits-all’ document can address all those nasty combinations.”