New business partnerships can be really exciting and it is easy to get caught up in a great business idea and want to just hit the ground running. But like most relationships there is a honeymoon period, and once that time is up, the differences between you and your partner can become more obvious and slow down or bring your progress to a screeching halt. So for this reason, I think that it is imperative that every business partnership begin with a solid legal contract that will protect all parties involved and give them a way to dissolve the partnership should the need arise.
Here are the things that a partnership agreement should include:
1. What happens if one of the principals of the partnership dies or becomes disabled?
No one wants to think about this, but it happens. And you want to be prepared. This is usually handled by a buy-sell clause that is funded with a life insurance policy, but consult with your lawyer for more options. If someone becomes disabled and is no longer able to contribute to the business, what is your plan of action in that scenario? Discuss your options and get it documented.
2. What happens if you have a conflict that can not be resolved?
Disagreements are going to happen with any partnership, and if you do the legwork ahead of time to learn about each other’s conflict styles you should be able to come to a peaceful resolution on most things. But what happens if you disagree on a fundamentally important issue and can’t come to a resolution? Does one partner have the final say or at what point in the conflict do you exercise a buy-sell clause? If you discuss these issues when the partnership is on good terms, it will make things much easier down the road if things get heated.
3. What happens if one partner declares bankruptcy or gets divorced?
Will you have to take on that partner’s creditors or ex-spouse as your new partners? Usually in the case of bankruptcy the economic interest of the insolvent partner will revert back to the other partners, or at the very least, be strictly limited to the economic interest and not any voting or controlling rights. This protects members of the partnership. Again, discussing this and getting it in writing before it becomes an issue is much better than the alternative. In the same realm, discuss and put in writing what you plan to do should one or more partners get divorced. If their spouse get’s interest in the partnership as part of the divorce settlement, do you want them to be involved in your business? If that isn’t a scenario you want to play out, plan for it ahead of time.
Having a business partner can help your business grow faster than it could with just one person at the helm, but it is important to go through the best and worst case scenarios before entering into any partnership, regardless of how perfect you think it might be at the moment. With a little bit of planning the sky’s the limit.