Business Partnerships Need Pre-Nuptial Agreements
By Dr Paul E Adams | January 31, 2005
As we shake hands celebrating our new partnership, we know it will succeed. Yet, as half of all marriages fail, are the odds of a business partnership success any different? Just as we enter in to a marriage contract to share our lives; do we not have the same expectations of our business partnership?
I believe all business partnerships need a pre-nuptial agreement. Such relationships can be complex with such thorny issues as: How do you share the workload? How do you split the profits? Do you have similar goals? What happens if the business fails? And if it does go sour- it can be as painful as divorce with similar feelings of anger, disappoint injustice, and deception.
In the business world, some think a handshake is a macho and romantic way of doing business. While such arrangements are great theater, in real life they are stupid and risky. Just as in marriage, misunderstandings are common. Are you aware that success may create more problems than failure? Money affects our behavior. Do you know how you will react to making or losing it?
Thus, if you are going into business with a partner-before you open the doors, get a written agreement. And, if you are in business, perhaps it is not too late to sit down with your partner and draft an agreement. Here are four major points that I advise you to include:
- Write a Job Description. Define the role and responsibilities of each partner. Who is responsible for sales, for filing the tax returns, inventory, advertising, housekeeping, or any of the many tasks in a business? It is vital that each partner know his or her agreed upon responsibilities . If you can t work it out in the beginning when everyone is cheery and optimistic, how are you going to agree when you are facing problems or tough times?
- Define Authority. Just as important as defining responsibility, is the need to define the limit of each partner's authority. What is the individual limit? What requires joint authority? Who has the final say? Who can sign checks, hire employees, fire employees, purchase inventory, sign contracts? Who can make commitments to customers or suppliers? As problems can arise from misunderstandings over turf and the right to make decisions, it is important to agree on the limits of individual authority.
- Establish Income Guidelines. How do you divide the pie? When your business starts to make money, I hope you have an agreement on splitting the profits. If one partner thinks he or she is the catalyst to the success of the company, there may be a problem without an agreement. Try to avoid it, by reaching an understanding-in writing- before the money starts flowing in.
- Get A Buy-out Agreement. A buy-out contract can protect everyone. If you desire to sell your share, you must be treated honestly and fairly, while at the same time protecting your partner and the financial well being of your company. If your venture has been successful, profit may be a strong inducement to cash out. Unless you determine in advance the method to be used to calculate the buy-out price, inflated perceptions of the value of the business can lead to difficult times between partners.
It is my experience, that once an agreement is in place, everyone feels better. You will have removed much of the possibility of unpleasant surprises from a relationship of loose ends to one of definition with a specific understanding of your relationship to each other.
Although, contracts and agreements may work to protect our interests, we can learn from Aristotle, who saw harmonious relationships as critical to well being. He concluded that successful partnerships are a basis of living well. Let me leave you with: Who you select to be in business with is as important as selecting the business to be in.
Editor's note: a lawyer can help ensure that your partnership agreement will hold up in court should that become an unfortunate necessity.