You may have heard that the relationship between business partners is like a marriage. Hard to believe but definitely true!
Divorces can be very acrimonious and agonising, not to mention expensive! This is because generally the ‘partners’ didn’t enter into a “partnership” agreement before marrying. Working hours, division of labour, decision making, capital contributions etc. are rarely considered because you just feel so right for each other!
This situation is also seen all too often when people are forming business partnerships with family or good friends. They just can’t imagine things turning sour … how could you possibly contemplate exit scenarios!
Just as bad as the lack of a partnership agreement is having a partnership agreement that is no more than a template: not individualised to the partner’s specific needs. Preferably the partners will sit down with their lawyer and accountant and plan for the stages of the relationship:
Commencement stage including ownership proportions; what contributions are to be made in cash or kind;
Operations stage including business planning, further funding, meeting requirements; dispute resolution; and
Exit stage – default events, valuation provisions, pre-emptive rights and deadlock provisions.
While the partnership structure is the simplest type of joint venture, the same issues need to be dealt with in other joint venture structures such as companies and unit trusts.
One of the most contentious issues arising during a partnership dispute is the value of the partnership i.e. who gets what and how this is calculated. A properly drafted partnership or JV agreement will have a mechanism for negotiating this preventing future disagreements. This is just one of many issues covered in a partnership agreement that could save you significant financial and emotional stress should things end unharmoniously for you further down the track.
Just like a ‘pre-nup’ in a marriage, instructing a lawyer to draft a partnership or JV agreement may bring up significant questions while you are blissfully in the honeymoon period of your business partnership. It is for this reason that they are too often avoided.
It is wise and will save potentially tens of thousands of dollars in litigation to get a partnership agreement at formation. The short term inconvenience of getting a formal partnership agreement drafted and the small expense is well worth it.
If you have any questions about partnership or other JV agreements please contact our office on (02) 4929 2000 or email@example.com and our experienced commercial lawyers will help you.