Why You Need a Partnership Agreement

Jan 4, 2012

If you go into business with someone, it’s important to have a partnership in place to address any potential issues or conflicts, according to Jeff Haden, who covered the topic in a recent CBS MoneyWatch article.

He advised partnership agreements should cover five different scenarios in order to protect both partners.

One of you wants out.

“Whether you agree to use liquidation value, book value, or the income, asset, or market approaches, stipulate in your partnership agreement how the business will be valued and whether a third party will conduct the valuation,” Haden wrote. “Then the breakup will be a lot cleaner and less emotional.”

One of you passes away.

“Stipulate that each partner will carry life insurance sufficient to cover the purchase of the other partner’s share,” Haden advised. “Each partner designates the other partner as beneficiary. Then, if your partner passes away, you always have the funds to complete the buy-sell agreement. Just make sure you add additional coverage as the value of your business grows.”

One of you wants to change the agreement.

“Perspectives change as a business evolves, and partnership agreements can be amended as often as you like — as long as all partners agree,” Haden wrote.

You can no longer get along.

“No matter how well you work together now, misunderstandings, hurt feelings, and changing priorities can damage the best relationships,” Haden wrote. “When that happens, falling back on the terms of your partnership agreement can help both of you stay objective.”

Your business is already established.

“If the agreement you have is insufficient-or if you don’t have a written agreement-it’s not too late,” Haden wrote. “Take a step back and create a comprehensive partnership agreement. If your partner hesitates, explain you aren’t trying to change your current working conditions. All you’re trying to do is eliminate as many ways you might disagree in the future as possible.”

To read the complete CBS MoneyWatch article, click here.