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Setting Up A ‘Fail-Safe’ Partnership
Partnerships are a “funny” thing. They make so much sense when you are young, eager to expand and enjoy working with each other. They are a natural outcome of mergers and of new, professional, growth oriented additions to an agency.
Partnerships are a lot like marriages. Some, like mine, last forever (like my 48 years of marriage) while others just “seem” to last forever. And still others are discarded for good or bad reasons.
But, as some marriages have Pre-Nuptial Agreements that are signed prior to marriage in case something goes amiss and the marriage ends in divorce, so should Partnership Agreements. Partnership agreements have their own form of “Pre-Nuptial” agreements that command the disposition of the partnership if relationship deteriorates.
While a marriage is very subjective and prone to emotional outcomes, a partnership doesn’t have to be commanded by either subjective feelings or emotions to judge and remedy situations that may arise.
For instance, a section of the Agreement directed toward dissolution upon mutual agreement can dictate and pre-determine the disposition of the business, clients, employees and most other assets of an agency. Another section can be created to assure that compensation among partners is fair and based upon productivity instead of upon ownership alone.
Too often we forget that there are two ways a working business owner gets paid. First, the owner is paid for his/her productive efforts in the same way and at the same rate as any other person doing a similar job. This way should something unforeseen occur to the owner, a replacement can be hired using the same funding dollars to fund the replacement.
The second way an owner is compensated is by dividends and/or equity build-up. If you own 50% of a business, you may have rights up to 50% of the annual profits (depending on the operating and planned future cash needs of the business). If profits stay in the business, the value builds dollar for dollar as the business’ Tangible Net Worth grows as well as the business providing itself a funding mechanism for growth without going to the bank every time you need new people or would like to acquire another business.
The smartest partnerships have a formula created for each owner that validates his/her value each year. Too many partnerships are stressed to breaking points because an owner ‘RIP’s’ (Retires In Place) and allows the other owners and staff to continue to provide growing compensation and equity without contributing the owner’s fair share.
Most of these concepts for partnership agreements is grounded in common sense. However, when we begin partnerships or bring in new partners, we may wear ‘rose colored glasses’ and assume that the relationship will always be strong and stable and that all the partners will always devote their time and efforts equally to build the business. Like Pre-Nuptial Agreements, we would be better off dictating what we will do if things don’t work out even though we fully expect them to flourish and be wonderful for the rest of our working lives.
If you would like help creating or re-creating a constructive partnership agreement, please call Agency Consulting Group, Inc. at 800-779-2430 and we will visit with you and help construct an Agreement that we all hope will never be needed but that will simplify partner problems and lend objectivity to both ownership and compensation issues to assure that no one feels cheated during the business relationship.