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by Nina Kaufman

According to the IRS, millions of people enter into business in partnership with at least one or more persons. However, AssociatedContent.com shows that 70% of all business partnerships do not last.

Thus, the importance of partnership agreements. Called shareholders agreements for a corporation and operating agreements in the case of an LLC, they provide a platform for partners to objectively agree on how to fairly “split” the firm in case of a buyout. This is called an “exit strategy.” An exit strategy is important to all businesses; however, there are some issues which rise up when two or more people form a business together.

Here’s a cautionary tale that can happen if you haven’t worked out exit strategies with your business partners: Gregory and Kristov were boyhood friends who started a men’s clothing line together. They formed a corporation and signed a shareholder’s agreement under which Gregory was obligated to put in the money and Kristov promised to put in the marketing and clothing design ideas. One year in, and Kristov was spending the money on fancy parties and supermodels faster than Gregory could make it, so Gregory wanted to call a “time out” to re-assess how the money was being spent. Kristov was incensed. After all, marketing was his job and Gregory was supposed to fund his work. Gregory was incensed. After all, money didn’t grow on trees and there had to be some fair way to stop the bleeding. Their shareholder’s agreement had no provisions on how to resolve basic disputes between the business owners and no provisions on how to handle a buyout of the company if they reached a deadlock. As a result, the company went through expensive litigation to dissolve and liquidate the business . . . which effectively destroyed the company and the friendship between the two.

Avoid this nasty outcome by taking steps to spell out why an owner would want to leave a firm. If that happens, what is an equitable price for his or her interests in the company? There are a whole host of reasons why something like that should happen, but here are the more common ones.

1. Unanticipated Events. Untimely Death, Divorce, Disability. Are there provisions to cover the unexpected death or divorce of a partner? If not, his or her spouse or designated heirs can step in and demand benefits and a salary. A physical disability or mental incompetence suffered by a business partner can place a greater financial stress on the firm than death does. Can the business afford to support an owner who can’t work or financially contribute to the firm? Provisions and funding for disability insurance must be established.

2. Resignation or retirement. A business partner sometimes just wants out either because there is a better opportunity elsewhere or because the person wants to sail around the year in pursuit of a long-held desire. Maybe he or she wants to retire. The partnership agreement should clarify the process and means to buy the stake of the leaving partner.

3. Giving the Boot. If a partner is found stealing from the company or sexually harassing the staff, those should be grounds for expulsion. Perhaps he or she is shirking from responsibilities — the partnership agreement should clarify the grounds for giving someone the boot.

4. Conflict. Many business partners overlook the need to build into the partnership agreement provisions for amicably settling disputes, big or small. Otherwise, a deeply divisive conflict could deteriorate into a deadlock which can only be broken by dissolving the company.

5. Worth of a company. The value of a company is one of the most important items to be addressed in a partnership agreement. The business owners must lay out in the exit strategy how to establish the worth of an owner’s interest when the occasion arises. Questions to address include “what is fair value” and “when do I have to pay for it?” Establishing a means beforehand for valuing a company gives all business owners peace of mind that should the occasion arise, they will receive an objective and fair price.

Putting together a partnership agreement requires forethought and planning. At the beginning of a company, all participants are willing to work together and that is the best time to map out a workable business pre-nuptial. However, to make sure all interests are well represented, seek out an experienced business strategy attorney who can help maximize value for all concerned with a well-planned exit strategy.

Fed up with the convoluted legal issues your small business faces? Check out the resources from Nina Kaufman, Esq. at http://www.GreatBusinessLawResources.com. She demystifies legal mumbo-jumbo to save you time, money, and aggravation. She’s also an award-winning business attorney, speaker, and columnist/blogger for Entrepreneur Magazine online. Get a free copy of her Entrepreneurs Business Law Primer at http://bit.ly/freebizlaw.