Partner Agreements How to get it right and avoid disputes

Starting a new business is an exciting time. You’ve decided on your product or service, your operating model and everything is rosy. But what about the legalities of the relationships between you and your peers? Have you thought about how this will work both at the start and as the business develops? Equally, if you have an existing business are the legalities of the relationship set on firm foundations that will enable effective management during periods of growth, instability or change?

Whilst many will opt for a formal company structure, partnerships are very common in England, allowing individuals to enter into a business relationship with less strict formalities than are required for a limited company. If this is your vehicle of choice, it is important from a risk management perspective to make sure that everyone knows where they stand, both now and in the future.

Whilst it is not a legal requirement to have a written partnership agreement in place, if you don’t, the relationship will be governed by The Partnership Act 1890 (“the Act”).  And whilst us lawyers love reading statute, most normal people do not. Plus the Act means that terms are imposed that you might not want or like. It is therefore important to take the time to record how your partnership will work and ensure that you review it regularly, so that it remains fit for purpose and has sufficient scope to take account of the ups and downs of normal business activity as well as the unexpected. Not only will this mean that you are in control of the relationship rather than a piece of legislation that was drafted over 130 years ago, but it will also help you should (perish the thought) a dispute arise.

Sadly, we see many partnerships disputes and are often told by our clients ‘I never thought this would happen’. Taking pre-emptive steps is not a sign of weakness, or that you don’t see things succeeding, but rather it is a commercial and pragmatic approach.

Here are some top tips for what to include in a partnership agreement and what to keep in mind as the business grows:

• Investment – you may have decided on a simple split in respect of investment into the business but what if you are investing different amounts – from both a monetary and time perspective? Think carefully about how money should be used and allocated, particularly as the business evolves and new contracts are entered into. Make sure any mechanisms in place set out a clear understanding of how the finances will work and that this is reviewed on a regular basis, otherwise this can become a real bone of contention.
• Duties – there can be a big difference between what one person sees as their role and what others within the partnership perceive it to be. This can lead to a misalignment of views on who is entitled to what profit. Without a clear separation of duties and understanding of boundaries, disputes can easily unfold. Evidently this is a part of the business makeup that can change over time, so should be reviewed regularly to ensure that any agreement in place truly reflects the position.
• Decision Making – in the early days it is likely that you will agree about most things, but that might not always be the case. It’s important to define who will be responsible for the day-to-day management, what kind of decisions can they make alone and what decisions need a unanimous vote from all the partners, or at least 75%. Put together in writing how the process will work so that everyone is clear from the start. Ensure that there is a mechanism to allow you to make changes in future, not only to the agreement generally, but also to key business requirements if needed.
• Critical Events – many issues arise over succession planning and the process for an outgoing partner and what happens to those continuing. If there are only two partners and no written agreement in place, then the partnership will automatically dissolve if one retires. So whilst you might not be thinking about that stage in your life just yet, make sure you at least have something in writing to explain what happens if and when you do. Additionally, while a sale or buyout probably won’t be on the cards in the early days, it’s worth considering how the company should be valued for such purposes and review this every few years to make sure it’s still workable. Danger can arise if the process is not properly documented anywhere, or conversely if formalities are set out in a partnership agreement but not adhered to.
• Dispute Resolution – what should the process be if a dispute arises between you and your fellow partners? A multi-tiered dispute resolution provision can be a good idea as this ensures that the parties follow a sequence of processes which hopefully encourage everyone to sensibly settle issues without the need to resort to more draconian steps. Also consider how important it is if a dispute does arise that any facts remain private. If it is important, then you may wish to consider referring any dispute to arbitration rather than court proceedings.

Whilst having a written agreement in place is not a sure-fire way to make the partnership work, it certainly will go a long way to helping it remain on the straight and narrow. If things do start to go wrong, they can become complicated very quickly so take the time to try to resolve issues and look at the bigger picture as quickly as possible.

This is a guest blog which contains the views of the author and does not necessarily represent the views of the IoD.