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Most business partnerships begin with trust.

Whether the relationship is between friends, family members, former colleagues or long-standing business contacts, many partnerships are formed with a shared vision and confidence that everyone will continue to work towards the same goal.

That trust is often well placed.

The problem is that trust alone does not answer difficult questions when circumstances change.

"We'll Never Need a Formal Agreement"

One of the most common assumptions business owners make is that a formal partnership agreement is unnecessary because everyone gets along.

Unfortunately, it is often when relationships are strong that important conversations are postponed.

Questions such as:

• What happens if one partner wants to leave?
• How will profits be shared?
• How are major decisions made?
• What happens if one partner contributes more than another?
• Can a new partner join the business?
• What happens if a partner retires or passes away?

can easily be left unresolved.

The Problem Is Rarely the Relationship

Many partnership disputes do not arise because people have intentionally acted unfairly.

More commonly, disputes develop because different people have different expectations.

One partner may believe profits should be reinvested.

Another may prefer to draw them from the business.

One partner may wish to expand.

Another may wish to maintain the status quo.

Neither party is necessarily wrong, but without clear documentation there is often no agreed framework for resolving the disagreement.

Success Can Create New Challenges

Ironically, some partnerships encounter difficulties because the business is successful.

As revenue grows and the business becomes more valuable, decisions become increasingly important.

Questions of ownership, succession, investment and future direction can become more significant than they were when the partnership first started.

What seemed straightforward at the outset can become considerably more complicated years later.

Prevention Is Usually Better Than Resolution

A well-drafted partnership agreement allows partners to discuss important issues before problems arise.

By establishing clear expectations from the outset, businesses can reduce uncertainty and create a framework for addressing future changes.

Partnership agreements commonly address:

• Profit sharing
• Decision-making
• Responsibilities and authority
• Retirement arrangements
• Admission of new partners
• Business succession
• Dispute resolution
• Partnership dissolution

Expert Insight

"Many of the most challenging partnership disputes we encounter are not caused by dishonesty or bad faith. More often, they arise because key issues were never properly discussed when the business was established. A partnership agreement allows those conversations to happen at the right time, providing clarity and helping to protect both the business and the individuals involved."

Ben Jackson, Partner, Eaton Smith Solicitors

Looking to the Future

No business owner starts a partnership expecting it to fail.

However, planning for change is one of the most effective ways to protect both the business and the relationship between partners.

Taking advice and putting a partnership agreement in place at an early stage can provide certainty, reduce the risk of future disputes and create a stronger foundation for long-term success.

For advice on partnership agreements, business structures and succession planning, contact Eaton Smith's Corporate & Commercial team.