The simple answer would be to say… no, Partnerships don’t work. We have come across too many businesses who have realised this too late.

If you’re starting up a new business, forming a partnership might seem desirable, because:

  • You’ve come up with a great business idea with a family member or friend
  • You have two heads to bang together, skilled in different areas

But we don’t believe they work unless you have a well thought agreement in place from the start, and you’re aware of the risks.

Let’s dig into the why.

It’s the case study that keeps on repeating itself:

We’ve lost count of the number of partnerships we’ve worked with at A4G where the partners have fallen out – and often due to a variety of factors.

Even partnerships that seem to work “on the surface” often hide seething resentments (sometimes on both sides) about unequal distribution of work or unfair split of profits. We’ve dealt with a business still working under a name that contains the initials of partners who left within one month of the business starting! All evidence would point to the simple truth that partnerships (and by partnerships we include limited companies where there is more than one shareholder) just don’t work.

But can they?

What can be done to minimise the chances of failure and make a partnership really work?

Partnerships can work, but only if all partners go into the partnership with a clear understanding of their responsibilities and their earning potential. And perhaps most importantly, that all of these issues are contained in a signed document. Because memories fade and one person’s understanding of the deal they made with another can be very different even after just a few months.

Not only do you need to decide who does what, but what happens if one of you dies or gets fed up and wants to leave. This can be uncomfortable to approach, because you’ve likely gone into business with a friend, family member, or someone who shares the same drive and enthusiasm for your goals. But it is crucial that these things are decided upon and documented.

Before going into business with someone it is vital to think through long term strategies and possible outcomes. Many partnerships are between family or friends and therefore the individuals often deem a partnership agreement unnecessary. But these types of relationships actually have a higher risk of breaking up than those that are set out on a more formal footing.

If you’re thinking about forming a partnership, it is vital to:

  • Agree on each partner’s responsibilities
  • Agree on each partner’s entitlement to profit
  • Agree on each partner’s leaving conditions
  • Agree on any other working arrangements
  • Discuss what’s important to you
  • Read our blog post on ‘Why most partnerships fail

These agreements act as a reference guide, in order to avoid misunderstandings and ensure that all the partners are pulling in the same direction.

The mere act of discussing these issues at the outset, will help to avoid complicated problems and misunderstandings further down the line.

When you have a written agreement, it becomes much easier to identify how and where there has been a breach and the consequences following that breach.

Typical problems and how to resolve them

Deadlocked companies 

But of course, if you’re already in a partnership and it’s not going well, you need to resolve these issues. We asked Jay for Jarmans Solicitors how businesses can resolve a typical problem of partnerships: deadlocked companies.

“A deadlocked company is where two shareholders have equal voting and management rights but are no longer able to work together.

Usually these are resolved by way of an unfair prejudice petition under Section 994 of the Companies Act.

To succeed, the complaining shareholder must demonstrate fault on the part of the other shareholder (i.e., that the company’s affairs are being conducted in an unfairly prejudicial manner). 

Of course, this is absent of any provisions in the articles of association or shareholders’ agreement to break a deadlock (this is why they are so important!). There is no such thing as “no fault divorce”. 

Alternatively, an application can be made under Section 122 of the Insolvency Act 1986, on the basis that it is just and equitable that the company in question, even though solvent, should be compulsorily wound up. 

Out of court solutions for deadlocked companies:

  1. Chairman’s casting vote
  2. Outsider’s vote
  3. Reference to shareholders
  4. Mutual put and call options 
  5. Arbitration or expert resolution 

We can help ensure your partnership is a success

So can business partnerships really work? Of course. The key is to prevent, rather than cure. So, if you’re going to go into business with someone close to you, don’t skip the formalities, if you want to continue to be close to them!

We’ve made it really easy for you by creating a business partnership template so you have no excuses. Pop your details in the form below to receive your free copy. 

If you need support putting this together and setting this up, contact us on 01474 853 856 or discovery@a4g-llp.co.uk. 

Download

Partnership Agreement Questionnaire

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