Posted by Robert Verri
Why do so few SME Partnerships have Partnership Agreements?
Primarily: the cost…. Business owners look at the cost as an expense that they don’t really need to incur because, lets face it, the business has just started so “why spend money unnecessarily, the business can’t afford it right now!”
My response to that is you cannot afford NOT to have an agreement. The cost of dissolving a partnership outweighs the cost of setting up an agreement tri-fold. Believe me when I say that the legal costs can escalate beyond belief.
Secondly: a Partnership Agreement can sometimes be viewed as a ‘touchy subject’. When two or more parties get together to join forces, it’s usually for the first time and they really don’t know if they can work together.
A working partnership is similar to marriage, you get to see warts and all. Partnership Agreements are to a business as pre-nups are to marriage. They cover issues that may make some people feel uncomfortable. Ask yourself: what happens if one of the partners gets really sick and can’t work anymore, or heaven forbid dies. Do the remaining partners, want to be stuck with the debts of the business and unwanted spouses as partners?
The reality is, a partnership agreement is like a rule book for your business. It lays down the rules for future wage increases, future new partners, financial performance evaluation, succession planning, insurance requirements, buy/sell requirements, distribution of profits, minimum duties of partners, future business plans, and confirmation of the product/service offerings for the business.
We have had the unfortunate experience of dealing with many partnership splits, a few of them took our advice and finalized a partnership agreement. Those few were able to walk away and dissolve their business with little or no expense…pain free. I can’t say the same for those that didn’t have an agreement…their situation got very ugly and very, very costly.
Partnership Agreement: can you afford not to have one?
