Partnership agreements

When is a partnership agreement useful and who should have them?

Posted by Carl Gould on June 04, 2010
7 Stage Success with Carl L Gould, News Articles / No Comments

When preparing for an interview with MSN, I was asked to answer a number of questions regarding partnership agreements. I offered the following insights on partnership agreements. I have created, arbitrated, and been part of partnership, JV (joint venture ) agreements internationally as well as domestically, and shared my perspective. 

Q; Who needs a partnership agreement?

A; A partnership agreement should be used whenever two or more parties agree to enter into a business relationship where money or services (i.e. barter) are being exchanged. Partners could mean two or more individuals or two or more companies. 

Q:why?

A: Research has shown that less than 50% of any conversation is retained and remembered by both parties.  When a conversation is memorialized in an agreement, the party’s memories seem to improve! J Another important reason for having an agreement is so that any interpretations or miss-interpretations of the oral/handshake agreement can be resolved BEFORE money or services exchange hands. Money is an emotional topic and the more money is involved, the more emotional people get. Having a written agreement removes the temptation for any of the parties to violate the agreement. Historically, most agreements include breach language with penalties and consequences. Those penalties and consequences tend to keep the parties on the straight and narrow.  
Q: What should be included in this agreement to make it successful?

A:

  1. A list of all parties that are OR MAY BECOME INVOLVED in the agreement.
  2. The scope of the activities that the agreement will cover.
  3. What the agreement does NOT cover.
  4. The duration of the agreement.
  5. Start date and end date.
  6. What constitutes a breach in the agreement
  7. The ability and timeframe for either party to correct the breach of the agreement.
  8. Exit language: Should either/any of the parties wish to exit the agreement, there should be a process/price to exit.
  9. Method of payment for services rendered.
  10. Mechanism to determine whether or not the actual operations are meeting the goals set forth in the agreement.
  11. Roles and responsibilities of those who will be carrying out and implementing the activities set forth in the agreement.
  12. Arbitration procedures to resolve disputes.

Q:. What shouldn’t be included?

A:

  1. Telling either party HOW to execute their responsibilities. Otherwise, it would be an employment agreement.
  2. Dictating hours of operations.
  3. Any language that removes flexibility of the parties to resolve and correct any short falls in achieving the stated objectives.

Q: What can happen without a partnership agreement?

A:

  1. Misinterpretation on who gets what and on who does what. 
  2. ‘He said – she said’ arguments. The parties will get selective amnesia and only remember the parts of the agreement that benefit themselves.
  3. In most agreements one party contributes the money and one party usually contributes the expertise. Without an agreement the money person tends to end up with more money and the person with the expertise just usually ends up with more experience (and less money).
  4. One party will take advantage of the next party. 

Q: How air tight can these agreements really be?

A: The more ‘air tight’ you try to make an agreement, often times the less likelihood of success the partnership has. If this were a purchase or sales agreement, you could make it very air tight.  A partnership agreement, however, can only be made so air tight. Entrepreneurs by their nature do not like to be told what to do so the more restrictive you make it the less likely they will be to follow it. Paradoxically the more flexibility you can put into the agreement while still maintaining the spirit of the initiative, will give the partnership the highest and best chance of success.
Q: Can’t someone litigate if they want?

A: Yes, depending how valid their claim is will determine how far they will get. Bear in mind that an agreement is only as good as the people who enter it. Before entering any agreement, written or not, you must feel as though you trust the other parties implicitly and that you feel confident they would honor the spirit of the agreement whether it was in writing or not. While a good agreement removes the temptation for non-performance, it doesn’t ensure that the parties will execute their duties fully. Therefore an agreement should be a reflection of how strongly the parties feel about each other and how committed they are to a unified result.

Regards,

Carl Gould

Chief DISCoverY Officer 

The Global Leader in Business Mentoring

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