At some point in your career as a small business owner, you will find yourself either needing or wanting a partner (I use the term “partner” in the loosest sense of the term). Whether it is for the purposes of adding/retaining talent, expanding your business and talent pool, sharing expenses, or building a succession/exit plan, finding someone to partner with in serving your clients is essential for businesses to survive for multiple generations.
There are plenty of horror stories on partnerships gone bad. However, there are many benefits that come with teaming, whether it is with a peer or up-and-coming junior partner. So, when the time is right, make sure you plan for the worst and hope for the best.
This means that if you have a partner, or partners, you should have a partnership agreement of some sort (or a Shareholder Agreement, Buy-Sell Agreement, etc.). These agreements can serve many purposes and the contents vary widely, but, the goal is consistent: Protect all parties involved, reduce potential conflict, and make sure the business can survive a break-up without the clients suffering. So, what does a partnership agreement look like? A basic partnership agreement will typically include:
- Initial contributions
- Nature of the business
- Roles, duties, and titles
- Compensation and expense sharing
- Voting rights and things that require a vote (i.e. large expenditures, encumbering the company, admitting new partners)
- How disputes will be resolved
- How profits (or losses) will be handled
- Buy-out provisions in case of an owner’s death/disability
- Non-solicit/no-serve clauses for firm clients
- Valuation methodology
There are also a variety of interesting optional provisions we provide our clients, like one included for a recent client, referred to as a “Shotgun Clause” which is designed to ensure a buy-out can/will occur if there is ever a dispute that cannot be resolved. This type of clause essentially allows one owner to offer his/her ownership at a named price. If the other owner agrees, then a sale/purchase will occur. If they do not elect to purchase, then they must sell their shares to the offering owner. As you can see, this clause, when triggered, ends the partnership but can help avoid long drawn out legal battles where everyone loses. Partnership agreements may be long and comprehensive or they may be short and concise. The key is to have a plan that helps provide structure for the relationship in case there are ever disagreements, questions, or issues that arise.