May 10, 2011

Partnership Agreement- GET ONE!!

My apologies for yelling the last two words of the title, but this is an important enough issue for me to raise my voice. Let me be very clear about this; if you are in a business partnership, and do not have a formal, written agreement, GET ONE YESTERDAY. I was contacted a few weeks […]

My apologies for yelling the last two words of the title, but this is an important enough issue for me to raise my voice.

Let me be very clear about this; if you are in a business partnership, and do not have a formal, written agreement, GET ONE YESTERDAY.

I was contacted a few weeks ago by a very stressed out partner of a business. He/she was one of two friends who went to school together, were entrepreneurial in nature, and both contributed to getting a business off the ground some time ago. While initially all was well with the business operation, the person who contacted me (let’s call him/her Mr. Smith) was concerned that in the last few years, work was not being distributed equally in the business.

Mr. Smith also mentioned the fact that a major life-changing event was about to occur in the life of the other business partner (let’s call him/her Mr. Jones), and Mr. Smith was sure that Mr. Jones would not even want to be part of the business after the life event took place. Mr. Smith therefore wanted to know what it would take to buy Mr. Jones out of the business.

My first question to Mr. Smith was simply this: “What does the partnership agreement say about buyouts?” Mr. Smith’s answer was simple, yet ominous- there was/is no partnership agreement. The “implied” relationship is a 50% ownership by each partner.

My next question to Mr. Smith was, “In the absence of a formal agreement that addresses this type of situation, and with each of you owning a 50% share of the business, what gives you the right to buy out Mr. Jones?” Mr. Smith was adamant that, with the relative amount of time that each spent in the business, in the eyes of the clients, and for all practical reasons, he was the managing partner. After our conversation, we decided that he would take a business day or so to approach Mr. Jones about the possible buyout, and he would let me know how to proceed.

Mr. Smith’s demeanour was MUCH different when I heard from him the next business day; he reported indignantly that Mr. Jones offered to buy him out .

Needless to say, that situation is going to need more than just a valuation to clean it up; the partners will now have to spend money on a business attorney, who will have to unravel that business relationship and apply the various statutes necessary to determine who has the right to buy out whom.

If you have started a business partnership, and there is no formal agreement in place, shame on you. Punish yourself in whatever way you deem necessary, and then you and your business partner run- don’t walk- to a business attorney, so you can get that important step figured out.

And if you’re in the process of setting up a business partnership, now’s the perfect time to have that done- you cannot foresee the various events that will necessitate you needing the partnership agreement, but if/when one of those triggering events occurs, you’ll be glad you have the protection that a formal agreement provides.

Next week, we will discuss a major component of a proper partnership agreement- the buy-sell clause .

A few thoughts: