One of the most important steps that you can take when drafting a partnership agreement is anticipating the possibility of needing to end the arrangement. The terms that you include will help determine how effectively you’ve protected the interests of all involved and boosted the chance that a partner or partners to walk away with a minimum of stress and pain.
Below you’ll find the essential provisions that must be included to make that happen:
- Grounds – You’ll want your partnership agreement to address the grounds on which disassociation can take place. These can include retirement, death, disability as well as voluntary withdrawal, or other specific events. As hard as it may be to address, you’ll want to include terms about expelling a partner in the event of ethical breaches, criminal activities, or other types of violations.
- Notice and transition – It’s important that you specify how much notice a partner is required to provide before disassociation, and how long they need to remain in place to ensure that all responsibilities and process information have been transferred.
- Valuation of interest – When a partner leaves, their interest in the partnership will need to be evaluated and they will need to be compensated. Your agreement should specify the valuation method.
- Buyout mechanisms – In instances when a partner’s share of a business needs to be purchased, your agreement needs to define how the buyout will be funded, whether in installments, a lump sum payment, or some combination of the two. You may also want to include details about whether external financing is acceptable and under what circumstances, as well as whether life or disability insurance can be used to fund buyouts required by a partner’s death or disability.
- Right of first refusal – Most partnership agreements demand that partners that remain have the right of first refusal to purchase the disassociating partner’s share of the business before they attempt to sell it to an outsider.
- Non-compete clauses – Your business may want to prevent a departing partner from leaving for a competing company or soliciting clients or employees away. Non-compete and non-solicitation clauses that address time and geographic limitations should be included to address these issues.
- Dispute resolution – To avoid litigation, include language that establishes the method of resolving disputes. This is usually mediation or arbitration.
- Business continuity – Include terms about successors and assignments of responsibilities.
The best way to ensure that your partnership agreement addresses all of the important points is to have it drafted by experienced professionals. Contact us today to set up a time to discuss your needs.
