Partnership Agreements – Friend or Foe?

March 23rd, 2015   •   no comments   
Partnership Agreements – Friend or Foe?

You’ve got a great idea for a new business and have found a couple of people to work with who can help you make it happen. They have skills that you don’t have and since you’ve known them for some time, you feel you can trust them. However, you also understand that things can change, so you decide as a group to draw up a good partnership agreement and have it vetted by a lawyer. Good solid decision making just like the books suggest.

Probably a big mistake.

I’m not sure why partnership agreements have been pushed as the preferred way to go in such circumstances, but my suspicion is that business schools and lawyers were involved! My personal experience complemented by my work with clients is that they cause a lot more pain than they ever relieve.

What’s wrong with partnership agreements? Lots usually but it often comes down to the fact that you are now locking yourself into something without having any idea of what the future holds. I find it very similar to the debate about whether a country should develop a hard and fast “constitution” (i.e. US approach); or, simply develop laws and agreements as you go along, responding to the situations of the times (i.e. British system). For example, do you think the framers of the US constitution had any idea how many problems the phrase “right to bear arms” was going to cause for future generations? They originally meant that people should keep guns to fight tyranny. Not to shoot eat other over a bad hamburger!

Once signed, problems start to surface. One partner works more than the other. Disagreements over decisions cause long-term rifts. Families take sides. If the thing starts to break up it gets really bitter with lawyers, etc. involved. Someone is usually controlling the cash. Another might have the password to the website. Who owns the name and the clients? While you can avoid some of this by having an iron clad agreement, there is nothing that says everyone is going to obey the agreement. The only alternative in such a case, ultimately, are the courts. Ugly all round.

What to do? Admit to yourself that things will probably change and that arguments will happen. Agree to a process that makes sense to both of you (no lawyers involved) and make sure that process is based on lots of meetings, conversations, ongoing decision making. In other words, admit at the start that you might hate each other and the only way to avoid it will be to discuss regularly.

In a current business I’ve formed with two other businesses, we did just that. We all kept our other businesses and agreed to no formal partnership. We drew up an initial set of ideas on how it would operate but also built in several layers of forced meetings, decision making and ultimately arbitration. We discussed quite a bit at the start, were very frank and built a relationship that allows anyone to walk away at any time. Will it work? Only time will tell but I feel a lot more confident in this approach than some of my failed partnerships in the past.

I was recently chatting with someone who has a 30 year construction partnership with his brother. They have no formal agreement at all and when they have a problem they thrash it out. As times have changed (e.g. one is now looking to retire) they just continue to talk and figure out how to deal with it. That makes sense to me.  Better than shooting each other!

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