It is unfortunate that many partnerships are doomed from the start or run into trouble down the line. Problems often arise over differing philosophies regarding growth strategy, branding and culture.
While different but complementary skill sets are an asset, some partners find too late that they get along great as friends but are incompatible as business partners. Sometimes partners sign agreements but then do not actually assume their assigned roles. At other times, grievances or disputes fester over time, leading to dysfunction. It can happen with even the most seasoned executives who launch a well-funded new endeavor.
Many of the problems boil down to poor planning at the beginning of the partnership. While mistakes and unforeseen challenges are unavoidable, an effective partnership agreement or LLC agreement can help keep the collaboration healthy and the ship on course.
Key issues to consider
The needs of each business and its partners are different, but considering the following helps formalize the arrangement and provide a solid foundation for building the business.
- Do not begin without a written agreement: This need not be a final draft, but a partner needs something in writing that addresses flow of money, governance and decisions, restrictions on transfer and buyout provisions, and other details before they invest their time, energy and money. More time and money sacrificed before signing an agreement means less leverage when it finally comes time to draft a contract.
- Plan for worst-case scenarios: Adversity can tear companies apart or bring owners closer together. How do they handle serious disagreements? What if one partner wants to leave? What if a partner’s marriage falls apart and the ex may be entitled to a portion of the equity? What about doomsday scenarios? Can one founder remove another? These are questions to consider.
- Address changing dynamics: One partner may provide additional capital or buy out another partner, which can shift the ownership dynamic.
- Get an attorney: An attorney should draft the documents and ensure the provisions are consistent with the partners’ expectations, taking into account plans for the future as the company grows.
It is best to be prepared
Plans provide thoughtful long-term solutions not created in the heat of the moment. Partners who run into problems or disputes can refer to their initial agreement and possibly adjust as needed. Business attorneys can help with the initial agreement and amend it when it is time to change the ownership, modify governance or make other changes.