Defeating Murphy’s law : Write a Partnership Agreement!

From the desk of John Brandow

Whenever you do business and there are partners involved it is absolutely crucial that a written partnership agreement are drawn up and signed by all parties concerned. This needs to be done before any vital business decisions are made and while the partners are still friends with each other. While it is not required by law, a partnership agreement can give you a framework for defining each partner's obligations, and settling the conflicts, disagreements and other difficult-to-resolve issues that naturally occur in nearly every business relationship. Ultimately, it will help ensure the long-term well-being of your business.
Starting off from the assumption that Murphy will always be present in any business venture. That is at least his laws that anything that can go wrong with the partnership will go wrong. The best intentions of a partnership will be broken when friction between the partners over the silly things in life comes into the relationship. These are things like Money, Power, (who may do what? Etc) and ego that might come into play.
It pays to be extra cautious when drafting such an agreement and it must make provision for most of the what-if situations that may arise and it must set methods for resolving these.
It is always advisable to make use of a knowledgeable attorney but it can save you money to draft the basics yourself. It is also necessary to make sure that the contract complies with local law. It is also advisable that the partners make use of independent lawyers to cover everyone’s interest and not use the company lawyer who cannot represent the interest of individual partners.
The following cover the basics that should be contained in such an agreement. There might be a few others that your lawyer might point out but it basically covers it.:
Basics
• Decide on a the name for the partnership?
• What is the purpose of the partnership?
• Is there a duration to the partnership- define it
Responsibilities, remuneration and performance
• Clarify each partner’s roles
• What are each partner's responsibilities within the company, and what level of performance is expected?
• What is each partner’s commitment in terms of time to the partnership. Is it full time, part time and to what extent will each partner do his own thing?
• How will the partners be remunerated and how will profits and losses be handled and distributed?
Contributions
• What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labour?
• How will partners loan accounts be handled , what are the terms and conditions, interest rate (if applicable) and exit strategy concerning these loans?
• Should it be required might the partners be expected to make additional contributions to the partnership and how will it be handled ?
Exit strategy of partners/admission of new partners
• What guidelines should be followed if one partner wants to leave the partnership?
• (make provision for a buy and sell arrangement and cover with life insurance)
• How will possible sales of partner’s share be handled ( first refusal to other partners?) and will they be allowed to sell to outside new partners. How will such new potential partners be screened and approved by the remaining partner/s?
• Describe the route to be taken should incidences occur where a partner is guilty of misconduct, non-performance of duties etc.
• Will new partners be admitted to the partnership and the methodology in such and instance

Buy-out procedures
• What are teh guidelines should a partner want to retire or leave the partnership?
• What happens if a partner is incapacitated or dies? (buy and sell agreement)
• Will the partnership take out Buy and sell life insurance to ensure the surviving partner is able to buy the deceased partner's shares from his/her heirs?
• Will partners who leave have to sign a restriction of trade agreement?. This can be included in the first instance into the agreement.
Dispute resolution
• What methods will be used to settle disputes that can't be otherwise resolved?
• What procedures should be used in the event of a tie vote between partners on crucial partnership decisions? This is important and could be solved initially by a 49/51% shareholding split although this might complicate matters
• Will you use mediation or binding arbitration?
• If disputes can't be resolved, is there a mechanism in place for dissolving the partnership?

Financial arrangements
• What banking arrangements will be made for the partnership?
• Which partners will have cheque signing privileges?
• Who will be authorized to draw on the partnership's accounts?
• How will the books be kept?
Method for dissolving the partnership
• When can the partnership be dissolved?
• What happens to the partnership if the partners decide they can't work together?
Valuation
• What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?