Smart Strategies For High-Stakes Situations

5 topics a new business partnership agreement should cover

On Behalf of | Oct 1, 2023 | business litigation

Starting a business with one or more partners can help you distribute the cost of the investment and the work that happens during startup. For that to happen, everyone needs to understand what to expect from the beginning of the relationship.

Partnership agreements set the terms of your business relationship, and they can help reduce the risk of an internal business dispute. When disputes do happen, a properly prepared agreement becomes a framework for resolution.

1. Decision-making authority

Your partnership agreement should outline the decision-making process, including how major decisions happen and who partners should defer to if there is a disagreement in each area of the company’s management. This area of the agreement should cover the decision-making authority of each partner, its scope and the limits on it.

2. Exit strategies

While it may seem counterintuitive, discussing exit strategies up front is an important step. Companies that anticipate events like a partner’s sudden life change taking them away from the business wind up having processes that allow these events to happen without disrupting the business. Forbes points out that up to 70% of all business partnerships end with a partner leaving.

3. Dispute resolution

No partnership is entirely free from disagreements. Setting up a process for settling disputes that all parties agree to follow can help to keep conflict from escalating.

4. Non-compete and confidentiality clauses

Business disputes that escalate beyond the scope of the partnership agreement’s resolution process could cause a partner to leave and start over. Non-compete and confidentiality clauses set the terms that protect your internal information and customer base.

5. Succession planning

Thinking long-term, consider incorporating succession planning into your partnership agreement. This outlines what happens if a partner retires, becomes incapacitated or passes away. Succession planning goes hand in hand with having a process for partners leaving when it comes to a smooth transition into new circumstances for you and your workers.

There are other key areas to cover in a partnership agreement when you start a business, but these five are key to navigating the disagreements and personality friction that happens in a partnership. That might be the key to its success in the long run.