Strong business partnerships result from well-communicated, well-established and clearly (legally binding) written agreements between each partner. Before you venture blindly into a business partnership, it’s important to learn what it takes to forge a strong relationship with the potential for long-lasting small business success.
Know Thy Partner
Successful business partnerships rely on the foundation that is built in the beginning. Many a partnership has been formed and failed because there was a lack of understanding or agreement on one part or another. Almost always, that lack of understanding or agreement could have been prevented had there been a formal written agreement in place from the very beginning. If you are considering going into a business partnership, regardless of how well you think you know each other, you should have a legal agreement in place.
Covering The Basics
That legal agreement should first cover all the basic and known concerns of the partnership. Address issues including, but not limited to:
• who is responsible for what costs (start-up and maintenance)
• who is investing and at what percentages
• who receives a share of the profits and at what percentages
• what happens if one partner wants to be released, such as in the event of health problems or disagreements, or simply other interests
• what will happen if the business fails
No doubt there’ll be other issues that need addressing which are specific to your business and to the nature of the partnership, investment and start up. For instance, if one of you own property or equipment that will be used or transferred to the business then those issues must be addressed, as well as issues of ownership and transference back to the owner in the event of a business closure.
Drafting The Agreement And Seeking Professional Advice
You and your partner may draft the initial agreement on your own, or you may choose to access a template from a business resource that helps you to draft the document. Still, you need to have the agreement refined by a legal professional (lawyer, attorney, solicitor) where you live. This will ensure that the document is legal and binding, and that all regulatory and legal issues have been addressed. A legal professional will also serve as an objective third-party, one without a vested interest who can see to the equity of the agreement.
While a legal agreement may seem like an unnecessary thorn between friends and willing partners, in the end it will serve as a resource and guide, as well as a form of protection for all parties. In business there is no replacement for that sort of preparation if the partnership and the business are to survive the challenges of working together.
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Business partnerships are just like heading into a marriage. The things that build a strong marriage relationship build a strong partnership. You need a clear understanding of boundaries and the willingness to talk “stuff” through as it arises.
But unlike a marriage the rules of who get what are not quite as clear-cut in the case of a business divorce. I agree – seek legal advice before the first dollar is co-created in order to reduce hassles down the track.
This is great information. Drafting the key points of a partnership agreement in advance can help to save money when you are paying an attorney by the hour to create the official document.
That’s a really good analogy Ingrid. You tend to think you don’t need any sort of agreement when things are all rosy, but if things turn sour, it’s much more difficult to sort out the agreement.
Absolutely… having your agreement drafted first can save a lot of time (and money) with a solicitor.
I was looking at a partnership with a friend and we were advised the legal docs would cost $8,000 to prepare by a law firm who were specialists in that area. A lawyer friend said that unless we were willing to litigate if the worst happens, we would be better off spending the $8,000 drinking beer together to build the relationship and extend the communication.
Most of the work is in communicating with one another to draft some “rules” so everyone is on the same page. You would be hard pressed to think of every scenario that could occur, so communication and a common understanding is really important.