Are Partnership Agreements Putting Your Business at Risk?

Partners can help make starting and operating a business easier and more successful. Having partners also means the potential of partnership breakups or problems.  When partnership challenges occur they can put the future of the business at risk. Partners should address as these items with honest discussion and documentation prior to entering a business partnership to reduce potential problems later. Here are 5 situations that can put a business at risk. 

1. Partner buy-sell. If a partner decides to sell their share in the business do the remaining partner(s) get the first right of refusal to buy the partner out? How are the shares allocated between the remaining partners? If the other partner(s) do not want to buy the partner out do partners get to approve the new partner?   Is the buyout structured so it doesn't financially strangle or the business? Getting partner buy-sell details agreed upon and documented early can save a tremendously stressful situation later. 
2. Partner leaves (by choice). What if your partner decides they are done working and want to travel and spend time with their family? What if they just decide to stop coming to work?  Do they still draw a salary? Does it trigger an automatic sale of their shares?  If they continue drawing a salary is it buying back company ownership? Is their ownership value capped at the amount when they leave? (If there is significant growth after they leave from the work of others)  Understanding what will happen if a partner no longer participates in the business but still retains a position or ownership is a very important topic to consider. When everyone understands what and how it will happen it can be done without killing the business.
3. Partner leaves (forced). What if a partner becomes disabled and can no longer work in the business? What if a partner dies? Does this automatically trigger a sale of their shares? How is the buyout structured? A forced departure of a key partner can ruin a business literally overnight. Partners should plan for this simply because they are going to leave people behind that they care about left to sort this out on top of an already difficult situation.  Forced departures are never planned so being prepared is essential.  This may be the only thing that can save a company in this situation.  
4. Partner's marriage dissolution. A partner gets divorced and their spouse gets an ownership stake in the company as part of the settlement. The spouse is now an owner of the company and a partner. Will they be able to remain a partner? Will they draw a salary or get distributions? Will they be allowed to make management decisions? Will the event trigger an automatic buyout of the spouse? How will a buyout be structured? This is very common occurrence in business that is rarely addressed until it causes problems. Partners and their spouses need to agree on these items early to protect the business.
5. Husband/Wife marriage dissolution. If a husband and wife have a business and divorce there a similar decisions. Will the business remain open? Will they both stay in the business?  Will one keep the business? Will the divorce trigger a sale of the vacating spouse's ownership?  How will the sale be structured? This can bring some difficult conversations at the start of a business but if a husband and wife both depend on the business to provide them income it will help to ensure the income stream continues.

Nonexistent or poorly documented partnership agreements force businesses to close, liquidate assets, take on too much debt, or experience detrimental changes which adversely affect the ability to continue operating the business. No business owner wants to experience these situations. Honest and respectful conversations at the beginning of the partnership and proper documentation may save your business.

 If you want to learn more about this and other important topics for business owners follow Cross Northwest on LinkedIn, like us on FaceBook, visit our web site, or email us: [email protected] for a direct response.

 Damon Pistulka is a Managing Partner for Cross Northwest. 

 Cross Northwest is a M&A Advisory/Business Brokerage/Valuation/Management Consulting Company with locations in Seattle, Park City, and Denver.