So you’re thinking of going into business with someone, how exciting! You know how profits should be split, and you know you need documents sorted, but what else is there? Here are the top 10 things that should be included in any partnership agreement, in addition to your profit split.
1. Outgoings and losses
In a perfect world, your business will take off and make you loads of money, which you split between you. But you also need to think ahead and have a plan in place for how you will handle a slow patch. What will be expected of you both if the business needs more money injected?
2. Loans and drawings
It is common for business owners to loan money to the business. Your partnership agreement should have clear terms for how, and when the business repays for loans. For example, what happens when the business owes one person money? Can the other partner still be paid profits?
3. Preparing Accounts
Often partnerships work well when there is a ‘business brain’ and someone that is savvy with the products or services being offered. When one person is responsible for the books, there should be transparency about how and when, the partners can receive reports about the financial position of the business.
4. Decision making
When a third party does business with a partnership, they don’t need sign off from both partners. Third parties rely on the assumption that whoever they are dealing with, has the authority and permission to do the ‘deal’. Partners should have clarity about what decisions can be made by one person, and what type of decisions need to be agreed upon by both parties.
Partnership agreements should include a process for calling formal meetings and meetings should be held regularly. You need to give yourselves time to talk about the business, and track together, how the business is operating. Equal partners should also have a process for how to handle a deadlock in decision making, including how votes are weighed and disputes are resolved.
6. Retirement or removal
It is hard in the excitement of starting a new venture to think about how it will end. But it is important. Running a business can sound freeing and exciting, but it is also full of hard work and not for everyone. In addition, life goes on – and down the track the partnership may not be working for both people any more. An agreement should include provide for this scenario and address things like how to value the business if one person wants to move on.
7. Bringing in someone new
Whether someone wants to step down slightly, or you have the scope to expand you should have clear terms explaining how the transition for work. For example, how to decide if the person is right and how to value their investment in the business.
8. Selling the business
In the same vein, you should have some plans in place for how to deal with a sale of business. If the price is right! Again, a valuation method is always handy as well as how the profits will be split, how loans will be paid and who will be responsible for what during the process.
9. Death and TPD
Touch wood this won’t be an issue for you. But it is one of the most important discussions to have with your business partner. What happens if your business partner dies? Most clients I have worked with don’t want to be in business with their partner’s family. Which is what can happen, if the business forms part of your partner’s personal estate. Having a plan in place for what happens, means there is clarity, and a process to follow, during a highly emotional time.
10. How to document all of this?
The type of document that you need to record your agreement depends upon the structure of your business. This list is also not everything that must be included, so I do recommend you speak to a lawyer to figure out what is best for you.