When is the best time to enter a partnership agreement? Mission Peak Brokers predicts that market demand for businesses will be high this year considering the recovering economy as well as potential tax increases. So if you've been hoping to sell your agency to a trusted partner or bring in someone to help you grow, now is your chance.
According to Harvard research, 40% of business partnerships are formed between friends. However, many people aren't prepared for the agreement's strain on their friendship. When you enter into a business partnership, you need to define expectations. Are you selling your agency over time and slowly relinquishing responsibilities? How involved will your business partner be when it comes to making decisions? A partnership agreement will help you establish the foundation of your relationship.
Partnership agreements document important terms so you know how to resolve disputes as they arise or, in a worst-case scenario, dissolve the partnership. When forming the agreement, make sure to include these three sections: roles and responsibilities, partnership authority, and conflict resolution.
Define each partner's contributions and responsibilities.
The purpose of this section is to define expectations and enable partners to determine whether each party is honoring their responsibilities. This helps to ensure everyone is working to meet the agency's goals.
To elaborate, clearly defined roles give business partners a way to talk about expectations if one party isn't fulfilling their role. Laying out who does what helps keep everyone accountable. While you don't want to enter an agreement anticipating that it will be dissolved, it's always good to be prepared. After all, things can go sideways even in the best partnerships (even temporarily).
So draft this section when things are going well, and include your business partner. It's important to do this together so you can have candid conversations. Both parties should be honest about what they want under the partnership.
Clarify the partnership authority.
What is required before a new contract is formed? Who has the power to bind the agency in contract? Think about all the ways that you commit the agency to obligations as an agency owner. You sign media contracts, loan documents, leases, and more. The document should clarify who has the power to carry out these types of contracts and to which extent they may do so.
For example, let's say a partner wants to enter a $25,000 contract. Is that permissible in the partnership agreement? What about the duration of the contract? Clarify what limits are in place and how significant decisions are to be communicated. These provisions ensure all partners are on the same page and act in the best interest of the business.
If you're selling your agency, it's also important to think about succession clauses. Solo owners are used to making decisions without input from anyone else. But if you're relinquishing ownership of your agency over time, you'll need to start running decisions by your business partner.
Create a conflict resolution section.
Finally, you'll need a definitive way to resolve issues in case a conflict or disagreement arises that affects the way you and your partner run the agency. This conflict could be prompted by a specific activity, or it could be caused by something else. Still, partners need to be able to reference the agreement when they disagree.
Typically, this part of the partnership agreement identifies a mediator or a business counselor who can resolve conflict. Think of it almost like couples therapy for business partners. You don't have to list potential conflicts in the agreement. You only need to list who would help you resolve them.
If you're thinking about bringing on a business partner or selling your agency over time, you need a written document the defines responsibilities, partnership authority, and conflict resolution. By defining the boundaries of the partnership, you can ensure success for the relationship and your agency.