Why does a partnership agreement need to be in writing?

A partnership agreement between business partners must always be in writing.

This paper can be called differently – and the contract, and the partnership agreement, and the partnership agreement (in English it is called the shareholders agreement), you can make some conditions in the company’s charter. But in any case, this is a list of rules by which the owners of the company live and how they solve their problems and tasks. Not the company itself, but the owners of the company. And this document must be in writing.

Why does a partnership agreement need to be in writing?

Because the following items must be spelled out in the partnership agreement:

How to divide the company according to the size of the shares?
How are strategic decisions made in the company?
How do companies make decisions to liquidate a company?
What happens if one of the partners wants to leave the company?
What happens if one of the partners dies? How is the inheritance problem solved?
What happens if one of the partners donates his share to someone?
How do the owners of the company meet, how often, what decisions do they make?
In addition, it is necessary to describe the procedure for making decisions on strategic issues: how will partners create a new business or a new line of business?
And many other questions.

Often, when I consult with my clients, they say to me, ”Well, we’ve been together for 10 years, we are two members of the board and we are doing well. We solve all these issues every day”.

Often this is true, but they buy auto insurance not to break their car, but so that if something happens through no fault of yours, you have more rights and opportunities.

In addition, it should be taken into account that we constantly confuse the roles of a board member and the role of a business owner.

A board member and an owner are two different entities in the life of a company and people. And since the functionality is different, the decisions of the board member and the owner are made differently.

A member of the board, a general director is a person who solves a problem mainly at a tactical level. He needs to ensure the smooth operation of the company; to have money to pay current bills; for employees to work; to fill vacancies. And basically a member of the board in turnover – which is normal. The real life of board members is in flux, in solving everyday problems.

What then is the task of the owner of the company? The owner looks at the company from afar and decides in which direction the business is best to develop; what are the risks for the company in the near future; where to invest. The owner is a person with a strategic vision.

If at the same time you are both the owner and a member of the board, the director of the company, then it is impossible to sit on two chairs at the same time, no matter how hard you try.

Our human brain is more likely to solve a momentary issue than to think about a strategic goal. Think about what do you think more about the strategic plan for the development of the company or about everyday tasks?

Scientists have found that the human brain perceives immediate tasks as a higher priority. As a result, if the owners of the company do not think about developing their business at a strategic level, they leave the company at the same level, without moving forward. And this in the future means monetary losses, not earned profits.

The two positions – board member and owner – must not be mixed, and this is often done.

The owner must look ahead. And in order for the owner to really look forward, he (especially if he is also a manager) must stop, take off the burden of a board member for a while and think about the future of the company as an owner.

If you have several owners in the company, then you must conclude a written agreement between yourself, specifying all your relationships, both joyful (how to share profits) and sad (how you will diverge).

Many of my clients, having heard about the need to conclude a written contract, do not want to do this for various emotional reasons (I don’t want to! Why? I will offend my partner if I decide to formalize our relationship now!).

Yes, it is psychologically difficult to tell a business partner – let’s act on the basis now, but as the business develops, the more the business grows, the more formal it becomes. It’s just a matter of structure development.

And my answer to such clients: if you do not want to quarrel with a person later, when your relationship may become bad, then it is better to negotiate now, when you have a good relationship.

It is easier to conclude a partnership agreement at this moment, and, if necessary, review it once a quarter or every six months, than to go to court for years.

If you have questions about how to negotiate with your partner, follow the link and download 20 questions for a partner or contact me for advice.