Partnership Guide: 40 Questions for Any Partnership Agreement

A Guide to Putting Together Your Partnership Agreement

By Jeffrey K. Davis, Esq.

WHAT SHOULD YOUR BUSINESS GOVERNANCE AGREEMENT ADDRESS?

The following is a 40-point checklist that you should use when drafting a business partnership agreement. This is not an all-inclusive list but I have to say, it’s pretty close and has broad applications for many industries. The purpose is to get you thinking about your rights, your expectations and the process of running a company with someone else. Use this as a guide, as a conversation starter, as a template for a well-vetted and successful partnership.

Management Structure.

  1. Who will be involved in the day to day activities?
  2. Who will manage this company at a high-level?
  3. Who or how will the money be managed?
  4. How will decisions be made? For example, majority vote, unanimous vote, etc.
  5. What are critical decisions for you that require your approval?
  1. How will decisions be made with respect to acquiring property, personal property, real property, intellectual property, inventory, etc.?
  2. How will decisions be made with respect to selling or purchasing assets?
  3. How will decisions be made with respect to hiring, firing and disciplining employees, consultants, vendors, legal counsel, accountant, etc.?
  4. How will decisions be made with respect to the purchase of life insurance, liability insurance, disability insurance, general liability insurance and other insurances?
  5. How will decisions be made with respect to opening and maintaining bank accounts, borrowing money, lending money, bookkeeping, accounting, fundraising, or adopting a annual budget?
  6. How will decisions be made with respect to instituting, prosecuting and defending legal, administrative or other suits or proceedings in the Company’s name?
  7. How will decisions be made with respect to establishing pensions, and incentive plans for any or all current or former owners, Managers, employees, and/or agents of the Company?
  8. How will decisions be made with respect to fixing salaries for any member, manager, officer, director, etc.?
  9. How will decisions be made with respect to, contract management, debt collection practices, or receivables due to the Company?
  10. How will decisions be made with respect to Taking on new members/shareholders/owners

Financial Structure

  1. Have you had a discussion with your business partner about the financial needs of the company?
  2. What are the financial needs of the company to stay afloat, and for how long?
  3. What is the company’s overhead?
  4. What do you need to break even?
  5. What will you need in order to keep the business afloat for 3 -6 months such as in the case of a global pandemic?
  6. Will you as business partners be contributing or lending money to the company?
  7. What sources of funding have you considered, such as loans vs. investors?
  8. What are your financial goals or expectations of the first 6 months? Year? 5 years?
  9. Will the company make any distributions or declare dividends? If so, under what circumstances? How often?

Dispute Resolution

  1. What if there is an important decision that needs to be made and the owners are at a deadlock?
  2. How will you resolve disputes quickly and at minimal expense? NOTE: One option might be to put together an independent board of advisors that agrees to be the tie breaker specifically for deadlock issues. Another option might be to submit the claim to binding arbitration or mediation. Another might be to vest the final tie breaking decision in a trusted advisor.

Your Expectations in the Business

  1. Will you or your business partner be receiving a salary?
  2. Will you or your business partner be receiving any other form of compensation?
  3. Will you or your business partner be involved in the management of the company?
  4. Will you or your business partner be employed by the company ? What are your expectations with respect to being employed by the company? For example: for a set number of years, set salary, set job title, etc.?
  5. Will you or your business partner be required to devote a set number of hours per week/month to the Company?
  6. Will you or your business partner be expected to spend a minimal amount of time in the company office?
  7. Will you or your business partner be required to devote minimal number of hours per week/month to the company and its activities?
  8. Will you or your business partner be able to engage in competing or other businesses?
  9. Will you or your business partner be able to engage in other non-competing businesses?

Death of a Business Partner

  1. What happens if one of the principals of the partnership dies? NOTE: Usually this is handled by a buy-sell clause/contract that is funded with a life insurance policy.

Debt of a Business Partner

  1. What happens if any of the partners becomes financially insolvent and declares a bankruptcy, will you have to take on that partner’s creditors as your new partners?
  2. How will you protect the company from the debt’s of one of the business owners?

Divorce of a Business Partner

  1. Let’s say you’re a partner with Sally. But she and her husband Jim get a divorce and in the settlement Jim gets half of Sally’s interest in your partnership. Do you really want to be forced to take Jim into your partnership? How will you handle this situation?

Disability of a Business Partner 

  1. What happens if one of the partners is hurt and is no longer able to contribute their time and talent to the partnership, how will this effect their ownership interest and the way profits are split? NOTE: Disability in my view is worse than death. You’ve lost your ability to make an income, it can be burdensome on your family (emotionally and financially), so if you’re business is centered around you, then why not consider something like disability insurance? And if that makes sense to you (which it should) then why not figure out how to have the business pay for it as a potentially deductible expense?

The 41 Point Test for Evaluating Your Potential Business Partner

Over the years I’ve represented hundreds of startups, joint ventures and partnerships. I’ve even been a part of a few partnerships myself and had I put myself through the same 42-part test below perhaps some of those relationships would not have ended so miserably. People rush into business relationships all too often because we’re human beings and as much as we may want otherwise, we’re emotional by our very nature. It is one our greatest strengths but also greatest weaknesses. We put aside logic and reason for validation.

If you’re thinking about bringing in a partner, collaborating with another business on a project, or going into business with a long-time friend, I urge, no I beg you to go through the list below when you’re formalizing your strategic relationship.

There’s a saying that summarizes this best: “sometimes it’s better to leave them at the alter rather than suffer a messy divorce”. The point of this is to think things through and in doing so taking a more calculated approach to the best extent that you can.

I.         VALUES: All business planning, whether it’s your own business or a shared business starts with determining your core values. These core values can be a mix between personal and business (as they tend to overlap). These core values are the heart, root, and foundation of your business. To help you visualize this better, think of a mission statement as a recitation and memorialization of your core values. Now place that mission statement in the middle of a white board (often referred to as a vision board). The mission statement is the heart of your business. It is placed in the center. From the heart-center you have branches that connect to different goals, and hanging below each of those goals is the process for achieving your goals. Everything centers and revolves around your mission statement because it consists of your values i.e. what matters to you most as part of the vision for your business, for your life, and for your customers. Now, when visualizing this vision board, focusing on that heart-center, ask yourself the following about your potential business partner:

  1. Do you share similar values?
  2. Will you both fundamentally be moving in the same directions?
  3. Do you both want the same or complimentary things? Not everything has to be identical and sometimes that is a good thing. The goals and process are things that may change and adapt through the course of your business lifecycle. That’s quite common. The core of what your business is about, it’s values, are more akin to a constitution, like the constitution of the United States. That constitution doesn’t change and should ring true for both you and your potential business partner.
  4. What things do you want that might be at cross-purposes with each other?
  5. Where do you want to be? What do you envision for your business in a broad sense?
  6. What do you feel about the vision for your future?
  7. What are the principles and values that are important to you and for your business?
  8. What is the “greater purpose” for your business?
  9. How are you going to be different than the rest?

II.        CONFLICT: Dealing with conflict in your business is something that most business owners overlook. I’ve come across some incredibly brilliant business owners starting out, ready to take on the world, and in their zeal they didn’t take the time to consider how conflict is inevitable in all relationships in your business. The source of conflict is at minimal three-fold: partners, clients, and people that work for you. How people handle conflict will drastically effect your ability to function and could impact the culture of your business overall. Conflict between business partners can bring a business to a halt. If your business partner does not have the wherewithal to productively and efficiently address conflict in your business, it can effect the management of the employees and the level of necessary customer service. Conflict is inevitable because relationships are complicated and emotional. Conflict is the result of expectations not being met and the failure to communicate and document those expectations. With that in mind, think of the following:

  1. How does your prospective partner deal with conflict?
  2. Is your partner’s approach to conflict a match for your style?
  3. How does your prospective business partner communicate with you or others?
  4. How does your prospective business partner treat others that perform services for him/her?
  5. In times of stress will your prospective business partner stay the course or cut and run?
  6. How have they dealt with conflict in their past personal and business relationships?
  7. What happens if you and your partner reach an impasse, an irreconcilable difference on a fundamentally important issue? How will you handle it?

III. WORK ETHIC: I represented someone who fought with her sister over their business of 20 years. One of the key aspects to the dispute was that the opposition claimed my client quit because she “gave up on the business” by not showing up at the office. For many reasons they were wrong which is why we ended up being successful in the lawsuit and forcing the other side into agreeing to a substantial (well above market) buy out. However, it raised a lot of questions over whether one’s work ethic has consequences for their ownership in the business. If the attorneys who drafted the shareholder agreement were more clear on that point then perhaps we would have lost. Regardless of win or lose, those types of expectations should be addressed before you start the business (and preferably in writing) because they are absolutely a source of tremendous conflict down the line if expectations are not met. With that in mind consider the following:

  1. What type of hours will this person work?
  2. How much work will they put into those hours?
  3. How effective are they at what they do?
  4. What is their work style and can you live with it?
  5. What are your expectations for each other in terms of time devoted to the business?
  6. Where will people be working from? (e.g. an office, home, both?)
  7. How will you be accountable to each other and the business? In other words, how will you  measure and keep track of your business partner’s work efforts?
  8. What metrics will be used to measure the efficacy of your business partner’s contributions?

IV. INTEGRITY: Integrity is something that is often overlooked but critical for the survival of a clean and healthy business relationship. Integrity is the root of trust. If we’re being technical we’re talking about the quality of being honest and having strong moral principles; moral uprightness. It’s about the practice of being honest and showing a consistent and uncompromising adherence to strong moral and ethical principles and values. It’s about consistency. With that in mind consider the following:

  1. Do you trust this person?
  2. Is that trust based on real data or an emotional connection?
  3. How has this person behaved in their past?
  4. Does this person consistently meet their commitments, big or small?
  5. Will this person do what’s right, especially when it isn’t convenient or profitable?
  6. How does this person act when others are not present?
  7. How does this person speak about others when they are not present?
  8. Does this person follow through on their promises?
  9. How transparent is this person in their responses, access to information, and personal/business dealings?

V. THE ADD-VALUE: Determining the add-value is a more practical line of questioning. You’re trying to determinewhat you and your business partner bring to the table and if those are valid reasons for entering into this potential partnership. You’re trying to understand what about this potential relationship will make your business venture successful and profitable. You’re trying to understand how this person will work with you to realize your end goals. Your answers or motivations should not be just about money. In addition, if your responses to these questions are motivated because of fear, then you should reconsider the partnership altogether. With that in mind consider the following:

  1. What are your skills, talents, and resources that you and your business partner bring to the table that bring elements for success of your business?
  2. How do you complement each other?
  3. How do you and your business partner make for a stronger foundation for your business?
  4. Do you share a similar vision?
  5. Have you been able to discuss short term and long term goals?
  6. Is your business partner bringing something to the table that is more than just money?

VI. RELIABILITY. It’s a simple question really. Can you rely on this person? Is this the type of person you have to lie to in order to get them to meet you on time for dinner? If so, they’re not so reliable, and you may want to re-consider getting into a sophisticated business relationship with them that involves having to rely on their actions and ability to execute time sensitive decisions.

  1. Do they or will they come through as promised?

The foregoing is meant as a guide. It’s not a bible, it’s not law, it’s not set in stone. It’s nothing more than a thought provoking guide that I trust you’ll use as the baseline for considering a business partnership.