Going into business with someone else is an exciting opportunity, but still poses plenty of risks. A business contract between partners has to be airtight, or else the entire joint enterprise may fall apart. In this guide, we set out seven common business partner agreement pitfalls and how you can avoid them.
Here are the 7 common pitfalls your business partner agreement must avoid
1. Unclear Partnership Definitions
Your agreement should clarify the partnership’s precise terms. This includes where each party’s duties start and end — and will form the backbone of any successful joint venture. Your contract must be as specific as possible across every clause. Otherwise, there may be serious delays or deadlocks in key decisions.
You can avoid these issues by defining each partner’s title, position, and responsibilities. On top of this, the document should establish a clear reporting structure and note the types of decisions either of you might make. There must be some flexibility, however, including an annual review of this dynamic.
2. No Shared Vision
Many people rush into business partnerships as a means of making money. However, these are sure to fail if you don’t share a vision or key company values. Your business partner agreement might even reflect these different goals. However, you should instead agree upon a mission statement that fits your partnership.
This statement can actually be a part of your business partner agreement. You could even refer back to it at every opportunity to make sure you’re still following the same vision. When placing your shared values in the agreement, outline any possible consequences a partner might face if they break them.
3. Unequal Profits
Just as money can create partnerships, it may even bring them to an early end. Your agreement must specify if partners share equal profits. If not, it should also set out the reasons for this. For example, a partner with more responsibilities might create more value for the business.
Add each party’s percentage stake to the business partner agreement; this has to account for their main contributions. If active partners make the same amount as passive investors, however, they can end up feeling undervalued. This resentment then leads to arguments; as well as the possibility of a legal challenge.
4. Using the Wrong Structure
A general partnership is the most common format for business arrangements. This is a relatively simple structure that is easy to establish, but it might not fit your unique needs. If you’d benefit from passive investors, limited partnerships let them join without taking control away from active partners. Regardless of the structure you choose, having a clear Partnership Agreement Template is crucial to define roles, responsibilities, profit-sharing, and decision-making processes. This document ensures all partners are on the same page and can help prevent disputes in the future
You and your partner (or partners) must compare limited and general setups before defining the arrangement one way or another. Once you both agree on a structure that works, write this into your agreement. All parties should also be open to the possibility of the best structure changing over time.
5. Poor Conflict Resolution
Your agreement needs to detail how your partnership will handle disputes. These form a part of virtually any business deal, but how you respond to it can define its success or failure. Without a mechanism to resolve these problems, they will likely continue to escalate until your partnership ends.
You can fix this by adding thorough conflict resolution processes to your business partner agreement. This should include routes for arbitration and mediation, preferably with help from a third party. If you cannot reach a compromise, the business will suffer; and may be unable to make critical decisions.
6. Foregoing an Exit Strategy
You might want to hold off on implementing an exit strategy in case this suggests you aren’t very committed to the partnership. However, you’re simply being realistic — the agreement will likely need to end one day. When it does, you have to make sure it’s a seamless transition.
Leaving the exit strategy to the future will just make it harder to agree once that day comes. You and your partner must decide upon this from the start. In many cases, the exit strategy changes over time, which is entirely normal; but you must update the agreement.
7. No Legal Aid
Even when going into business with someone you trust implicitly, get a lawyer to look over your agreement. A legal professional will help guarantee the contract is fair to you at every stage. It’s paramount that you have a full idea of your legal obligations before the partnership begins.
This might seem like an irrelevant investment if you and your partner both have a clear idea of your goals. However, getting the contract to the highest possible standard from the start will only make everything easier for you. For this reason alone, always consult a professional.
Conclusion
No matter the steps you take, there’s always risk in a business partnership. A strong agreement that remains fair throughout, however, could save everyone a lot of stress. With the help of an online template, you can build a legally-sound document that lets you make the most of your arrangement.
