If you plan on going into business with one or more partners, it is important to have a written agreement in place. Spelling out all the details will help to avoid conflicts and leave you prepared to deal with disagreements, should they arise. This will also give you more control over your business without leaving it in the hands of your state’s laws.
You and your business partners should always consult a professional advisor to make sure you have covered all of your bases when drafting a partnership agreement. The important thing is to make sure you are prepared to manage, protect and grow your business.
Here are must haves for any partnership agreement:
Who Will Make the Decisions?
Be sure to talk about how decisions will be made. Will there be one primary decision maker whose voice carries more weight? Will all decisions be made by unanimous vote? This is an especially important consideration for cases where important choices must be made and there is no group consensus.
Who is Contributing What?
You need to identify how much capital each partner will be putting in to start the business. You also need to discuss what will happen if a larger investment is needed to carry the business until it becomes profitable. Will you simply close up shop? Will you seek an outside investment? Will the business owners put in more of their own money? These are things that need to be clarified if the worst case scenario comes true.
It should also be made clear what each partner's role will be. Will one person be the money source while the other is the workhorse? This needs to be spelled out on paper so that each person knows exactly what they are getting into.
Who is Getting What?
You also need to look at who will be getting what out of the deal. Make sure you are clear on the following questions:
- What will the salaries/distributions be?
- When will partners be able to take money out of the business?
- Will partners ever get their investments back? If so, When?
If one partner decides they want to build a large, national brand and another wants to keep the business small, there may be some disconnect in the amount of time that money will be kept in the company. This is why it’s important for all parties to be in agreement about how money will be distributed.
Is There an Exit Plan?
Nobody wants to talk about what will happen if things go bad, but it’s necessary. Relationships fall apart for lots of different reasons and you need to have a plan in place in case this happens to you.
What will you do if one of your partners decides they no longer want to be involved? It is important to work this out from the very beginning while spirits are high. It will only be more difficult if you wait until there is a problem to come up with an exit strategy.