Business and Commercial

Adam explains why when setting up a new business as a partnership it is worth taking a little time to agree  the big issues at the outset and to then incorporate these into a Partnership Agreement.

Falling in love is easy. Everything is new and exciting; all their jokes are funny; all their little habits are ‘quirky’.

Fast forward 12 months, 2 years or five years and you’re wondering why the wet towel is always left on the bathroom floor, why you’re the only one who can take the bin out or why they make that snorting noise when eating their cornflakes.

Next thing you know you’re practicing your “it’s not you, it’s me” speech and trying to work out who gets to keep the dog.

In the Beginning…

It’s all similar to what we consistently see in partnership disputes. At the outset of a partnership the shared vision and passion to drive and grow the business often outweigh discussions around defined roles; responsibilities; remuneration; succession and retirement provisions. When we suggest that a partnership agreement would be beneficial to a new business we’re continually told that “they’re my best friend”, “if I can’t trust family, who can I trust?” and “there’s no way we’d ever fall out – we’re in this together”.

Here’s what we see:

Partner A does ‘the numbers’; the banking, the wages, the suppliers, the customers and all the things which keep the financial life blood of the business flowing. They will be ‘the financial controller’, ‘chief financial officer’ or ‘accounts manager’ but will be happier away from the front line.

Partner B will be the ideas guys, frontline sales, the one at the coal front. They’ll have the skills set to manufacture, invent, develop or sell the business, the product and the ideas.

At the beginning they both respect what the other does and they stick to their own roles diligently.

Fast forward 12 months, 2 years or five years and there has been a shift. What we hear now is “all they do is handle the money- I could pay a part-time book keeper to do that” and “they do a few sales calls and make stuff – I could outsource that to China in the morning”. Invariably resentment grows , money becomes an issue and (often with the assistance of family members or spouses) the partners reach the point where they decide that they will be better off apart.

At that point they essentially ask us to handle the breakup. Usually the first thing we ask them is “what does your partnership agreement say?” Cue awkward silence, mumbling and blushing.

Why a Partnership Agreement Helps – The Big Questions

A partnership agreement gives the parties certainty in how they operate on a day to day basis and how they deal with problems as they arise. If you are in a partnership, ask yourself if you and your partner(s) have discussed and agreed on:-

  • Your roles in the business;
  • Responsibilities;
  • Drawings or wage amounts and how, when or if these amounts can be increased;
  • Are the partners able to take out additional monies from the business?
  • Is there to be a limit on what each partner can spend in relation to the business without consent of the other?
  • Sharing of profits – equal splits, different percentages or performance bonuses?
  • Holiday leave – how long can you take, can the partners take leave at the same time?
  • Hiring and firing staff – does there have to be consensus or can each partner hire or fire?
  • How much money can each partner extract from the business
  • Sick leave and salary payments during illness; will it be for a set period, a set rate or indefinitely?
  • What happens if you fall long term or terminally ill – do you know how you, the business and your partner will cope? What are the agreed exit terms?
  • What happens your share in the business if you die or are incapable of working, does your share revert to your family or will your partner have an option to buy?
  • Will you have key-man partnership insurance to cover the cost of buying your partner’s share on their death?
  • How you retire, resign or move on; is it clear how much notice must be given? Is there to be an agreed method of valuation? Will the remaining partner have the option to purchase the share?
  • How you sell your share of the business – can either partner enter discussions? Will you have put and call options in place?

Why Have a Partnership Agreement from the outset?

We understand that these are difficult issues to discuss at the outset but these are even harder questions to answer when parties begin to drift apart and relationships have deteriorated. Often, the parties have very different recollections of what was agreed at the outset and without prior written agreement between the parties it can be challenging, if not impossible, to reach consensus.

We therefore urge all our new clients to sit down and have forthright and open discussions around these issues and to then have us draft a tailor made partnership agreement. Then, if the worst happens, the parties can refer back to the agreement and hopefully reach a resolution without having to consult lawyers.

If partners can’t resolve the dispute or difficulties themselves then a partnership agreement will at the very least give a framework during mediation, negotiations or litigation which will reduce time, expense and stress for all involved.

In Summary:-

Discuss the important issues at the start, not the middle or the end;

  • Agree the key issues;
  • Have them incorporated into a partnership agreement;
  • Seek advice as soon as problems arise;
  • Consider seeking legal advice as soon as possible to engage in mediation or negotiations to reach early agreement and avoid litigation

 

This blog is made available by DMC for information purposes is not intended to provide specific legal advice in relation to any particular circumstances. You should therefore not act upon this information without seeking advice from a qualified lawyer and obtaining advice specific to your query. Your use of this blog is at your own risk and we cannot guarantee that the blog will reflect the most current legal developments at the time of reading. DMC will therefore not be responsible for any errors or omissions in the content of this site or blog. 

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