We do a lot of work crafting partnership agreements. If you’ve been a frequent reader of our blogs, you’ll know it’s something we talk about often in length. But one of the keys to partnership agreements is to have an exit strategy. So often, when we have problems in partnerships, it’s because the partners have decided to go different directions and there’s no way for one of them to safely exit without fighting with the other. However, I’m a big fan of partnerships, and I believe partnerships can add lots of economic value.
We look at many of the huge companies of the world today, and they’ve all had partnerships of different levels or types during their history. It’s key to unlocking economic value. None of us can do everything on their own, so we need to have partners. We need to have other people to work with, but how we work with them and how we interface with them will be determinative of how things work from a broader standpoint. We want to have partnership agreements that set clear boundaries and lines, and concepts between the partners so that we know which partners do we want, how they’re being compensated, and how that works.
A step beyond that is we need to be realistic, and we need to know that not every partnership lasts forever. Certainly even in the most intimate partnerships – marriages, we know the failure rate hovers around 50%, and there’s been speculation that business partnership’s failure rates are even higher. Many people are scared about a partnership. They swear off partnerships, and they say that they will not be business partners. Smart people know that there’s still economic value there. You just have to build it the right way, and that means exit plans.
That means having a strategy to recognize the fact that the partnership may not work forever and that the form will have to change. These are very easy things to build early in the life of the partnership. These provisions allow the partners to go different ways and to deal with contingencies. In addition, the partners can do the things they need to do to separate and sell the company off at a reasonable price so that one of the partners can walk away with economic payment for their time, effort and skill that they put into the partnership, and the other partner can do the same or potentially continue the partnership.
Why do people avoid doing this simple idea? Why do people not just always set up a partnership agreement when they form a new business? It comes down to a couple of things. A lot of times people are wildly optimistic, and they believe that their partnership is the partnership that will never fail – like many people believe that their marriage is the one that will never fail. Also, a lot of partners get busy in the formation process, and they’re not paying attention to the long gain and how everything will come together. So they just simply form their partnership, move on, and don’t think about how all the pieces will fit together in the future.
Some partners are just unknowledgeable. They don’t realize that their partnership needs these kinds of protections, and it’s not until they get burned that they realize that it’ll happen. Many times, when people come to us to have partnerships formed, it’s their second, third, or fourth partnership, and they’ve seen their business partners get burned, people that they’ve done business with have been burned or they, themselves, have been burned. These people are more likely to do the planning. It’s unfortunate that more people don’t do the planning before they get into these unfortunate situations.
There are some reasons for procrastination but none of them should prevent you from getting a partnership formed, and do proper documentation of how the partnership works together and what the exit plan is from the beginning. This will save great heartache and grief in the future.
Join us in the comments below and let us know about your thoughts and experience with drafting and negotiating partnerships. Perhaps you were one of those partners that got burned. Let us know how it went.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Karim Sahli.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
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