Let’s talk about the basics of what a Partnership Agreement is, what it should include, and if you need one for your business.
If you operate a business with more than one person, who both share the profits and risks of a business, you are in a partnership. A partnership can look like a chef and a barista starting a café together, three friends creating an online business selling crafts, or a husband and wife buying an RV park.
Regardless of the size of your business and the relationships between partners of your business, you should ALWAYS have some sort of written contract in place.
I’ve seen it happen. Two friends, creating together and selling their products. They equally shared the work and the profits from their venture. They had a disagreement, and the one “friend” cleaned out the bank account and dissolved their business overnight. No Partnership Agreement in place, no verbal or written plans for what would happen if they reached an impasse and couldn’t work out their problems, or a partner wanted to leave the business. It’s possible the other partner could have lawyered up and fought it, but without a solid contract in place, it would be tedious and expensive.
Our Experience As Business Partners
In our case, Amber and I bought a restaurant together as business partners. We are first cousins, we grew up together, and we are close and share a lot of similar values. We didn’t expect anything to go wrong, and we figured we would always be able to work out our problems.
I didn’t think she would ever stab me in the back.
Spoiler alert: she didn’t. It was completely fine, and we always managed to talk out our problems and find solutions. Even upon the dissolution of our partnership, everything was amicable and easy.
But it was nice to have our Partnership Agreement in place. Our Partnership Agreement lent a formality to our business partnership. It spelled out what we could and couldn’t do, what our accountability to each other and the business looked like, and how the partnership could end. It gave us an opportunity to have the tough conversations, instead of assuming we were on the same page.
Having a partnership agreement in place also meant we had more time for joy and making memories in our business (like buying our food truck and driving it 1000km home!) instead of navigating conflicts.
What Is a Partnership Agreement?
A Partnership Agreement (also called a Partnership Contract) is a contract between the partners of a business. They can be customized specifically for the needs of the partners, and could include details such as:
- the contribution and financial responsibilities of each partner
- the distribution of profits and losses of the business
- the roles of each partner in the business
- if and who is the “Managing Partner”
- how much each partner can spend (or how much debt they can take on for the business) without needing a majority vote of the partners
- how to add or remove partners
- what would trigger dissolution of the partnership (a fixed end date, someone leaving, illegal activities, misconduct, etc.)
- how to mediate disagreements (including a “Shot Gun Clause”)
Draw up a partnership agreement in the beginning stages of a startup business. It will guide you and protect you during the big first decisions of your business venture.
Do We NEED a Partnership Contract?
Yes.
Regardless of the size of your business, I recommend having an agreement in place.
For most partnerships, I advise having a professional draw up or at least review your contract before signing. This is especially important if there is significant money being invested in the business, or there are loans/debt being taken on for the venture.
However, an informal agreement can also be written up between the partners. My husband and I have a Google Doc spelling out what would happen if our business or romantic relationship dissolved. We trust each other completely, but it’s nice having an agreement in place if things were to get messy. Stuff happens. You don’t want to be figuring it out in the midst of things, when emotions are high.
Having either a formal or informal Partnership Agreement can set clear expectations among partners, maintain boundaries, and prevent misunderstandings down the road.
Your business partner may not be malicious, but misunderstandings about job roles, compensation and decision-making can break a partnership.
What Should A Partnership Agreement Always Include?
Here are three things I would always include in a Partnership Agreement:
Clearly defined roles
Partnerships are great because each person brings a unique set of skills, strengths, and lived experiences to the team. It is important to clearly define the roles of each person in the partnership, and then trust each other to fulfill those job duties.
Actions Requiring approval of the Partners
Clearly define what partners are allowed to do without consulting the other partners. Some items that could require unanimous approval from all partners might include:
- taking on new debt over $5000
- spending more than $2000 on a single item
- firing of an employee
- selling equipment or assets over $2000 value
Shot Gun Clause
A shot gun clause is a provision built into your contract that can be used if partners cannot come to an agreement. It’s a last-ditch measure to be used after all attempts at mediation have failed, and the Partnership is bound to dissolve. Once it is put into effect, it is legally binding and has an extremely short timeline to be completed, usually a month.
A shotgun provision allows a partner (the Initiating Partner) to set a “Price” and either:
Make an offer to the other partner (the Offeree) to either purchase the business from them (the Initiating Partner) for the set “Price”
or
Sell the Offeree their (the Initiating partner’s) ownership in the business for the same “Price”.
The Offeree has to respond. Either, they accept the offer, or they get to turn the offer back around on the Initiating Partner.
Here’s an example:
Patty and Jeff have a candle-making business together. There have been many arguments about the future of their business and the opposite directions they both want to go with it. Patty wants to use artificial fragrances to cut costs, but Jeff thinks their pure essential oils give them an edge in the candle world. Tensions are high, and they are unable to reach any decisions together. Production and growth are at a standstill.
Patty is frustrated, and initiates the Shotgun Provision. He offers to buy Jeff out of the company for the set price of $5000.
Jeff can either accept the $5000, and give Patty his share of the business and walk away. Or, he can turn around and buy Patty out of the business for $5000.
Jeff is offended that Patty thinks his percentage of the business is only worth $5000, and elects to buy Patty out of the business for that set price of $5000 instead. Patty has no ability to refuse this – it is binding.
In 30 days, Jeff is now the sole owner of a candle-making business setting all natural pure essential oil candles,
Takeaway:
The Shotgun clause prevents a partner from making a low-ball offer to the other partner. The partner making the offer must be content with the possibility of having that offer turned back on them.
Once a Shotgun clause is invoked, the ball is in motion to complete the sale within a short amount of time, usually a month. It is final and binding.
I’ve seen it used. It’s not pretty, but it’s quick and fair.
Ready to sign?
Whether it’s a Google Doc, a partnership template you pull off the internet, or a formal agreement drawn up by a lawyer, having a partnership agreement in place will help start your partnership off on the right foot with clear boundaries, expectations and accountability to each partner of the business.
Take it from us, regardless if you are close family members or trust each other completely, a Partnership Agreement is a must-have in any business partnership.
Do you have a Partnership Agreement in place? Do you have questions about one? Drop us a line in the comments!
Leave a Reply