How Partnership Agreements Can Unlock Success for Your Business
When your company enters into a partnership with another entity, you’ll need to draw up a partnership agreement that will govern the business relationship. A strong partnership agreement will contain critical terms that will determine how the partnership will be operated and how conflicts will be resolved. Contract management software can help make the contracting process of your partnership agreements more collaborative and seamless.
What is a partnership agreement?
A partnership agreement is a legal document specifying the terms and conditions regulating the relationship between business partners. A partnership agreement usually stipulates the responsibilities or roles each partner is expected to play in the business and their respective rights in the business.
Business partnership agreements can be between individuals, between an individual and an organization, or between organizations. For instance, a partnership agreement can be between an LLC and an individual or between an LLC and a corporation.
Partnership agreements may be between businesses in different industries or similar industries and companies enter into partnerships for various reasons. It may be to increase brand awareness, to have access to a different market, or to create a competitive advantage.
You’ve probably used a product or a product feature that resulted from a partnership between two brands. An example is the ride-playlist partnership between Uber and Spotify. Uber’s partnership with Spotify allows users to connect their Spotify account and choose the songs they want to listen to during their ride.
Purpose of a partnership agreement
In every relationship you enter into you’ll experience less conflict if you and the parties involved set the expectations from day one. A business partnership agreement will help you do the following:
Define the business relationship
Businesses enter into partnerships for different reasons. Will you be developing a new brand together like when Adidas and Kanye West partnered to create the Yeezy brand? Or is it a business partnership that will allow your organizations to do business together like Casper and West Elm partnering to allow shoppers to try out Casper mattresses in West Elm’s stores?
A partnership agreement will help you define the nature of the relationship that your organization and the other parties are creating.
Stipulate the rights and obligations between parties
There’s give and take in every business partnership. Your organization will have obligations to perform and rights it can exercise in the business relationship.
A partnership agreement will help you stipulate those rights and obligations so all the parties know what’s expected of them in the business arrangement. This way no party will be making wrong assumptions of the benefits they can expect to get out of the partnership.
Serve as a reference for dispute resolution
A business partnership is a relationship, and in every relationship, there may be conflict. Having a partnership agreement drawn up and signed by the parties involved will provide a legally binding contract that can be referenced to resolve disputes should they arise.
How to create a partnership agreement
Every business partnership is unique. There’s no one-size-fits-all method of creating a partnership agreement. However, it’s important to understand why you’re entering into that partnership in the first place. What are the resources each partner is bringing to the table? What is the synergy you hope to achieve?
You should also ensure that your partnership agreement provides a method for dealing with both foreseeable and unforeseeable circumstances.
It is not an overstatement to say that the strength of your business partnership depends on your partnership agreement. To create a solid business partnership, there are certain provisions your partnership agreement should contain.
What is every partner bringing to the table? Your partnership agreement should detail the contribution each partner will make to the business.
Contribution is not just financial, it includes any equipment, material, or intellectual property any partner brings to the business. The contribution will also include sweat equity, which is the effort any of the partners make in starting and running the business.
It’s important to stipulate the percentage of the business that each partner owns. It’s common for the ownership of the business to be commensurate with the contributions that each partner made to the business. But there’s no hard and fast rule on it. You and your partner(s) are free to decide the ownership structure of the business.
Most state laws provide that, when the partnership agreement doesn’t clearly state how the business is owned, the partners will be considered to own the business equally.
Profit and loss
By default, profit and loss are distributed according to the stake each partner owns in the business. If you want it to be different, then your partnership agreement should clearly state it.
Binding authority refers to the power each partner has to enter into contractual agreements on behalf of the business without consulting other partners.
By default, every partner in a business has binding authority. If you don’t want this, your partnership agreement should state how business decisions will be made and the extent of the authority every partner has.
Death or withdrawal
What happens when a partner wants to leave the business, or dies, or suffers a disability that makes them incapable of continuing to be a part of the business?
Your partnership agreements could include a bye-sell agreement determining how the interest of the deceased partner will be acquired or redistributed.
How will you resolve disputes that may arise in the course of the partnership? It’s common to state that parties will use mediation or arbitration to settle any dispute.
Duration or dissolution
Some partnership agreements clearly state how long the partnership will last. In that case, the partnership comes to an end at the expiration of the stipulated date. But, sometimes you may not be able to decide how long the partnership will last. You could run into situations where the business can’t move forward anymore. This is why you should decide from the onset how the partnership can be dissolved amicably so parties can go their separate ways.
Managing partnership agreements
A business partnership is not static. As the business grows or as circumstances change, there may be a need to revisit the partnership agreement to ensure it still reflects how you and your partners want to run the business.
Appraise the value of the business
It’s important that you periodically appraise how much the business is worth. It may not look like a big deal, but knowing how much your business is worth is important when you want to implement a buy-sell agreement.
This way, partners know how much their stake in the business is worth when parties are still on good terms.
Set review dates
Businesses change and grow over time. Periodically set dates for reviewing the terms of your partnership agreement. All the parties can come together and decide whether the terms of the partnership agreement are still viable or whether there’s a need for amendment.
Appoint an arbitrator
Business conflict in a partnership is almost inevitable. You should prepare for how such conflict will be handled.
You can specify in writing that any conflict that partners are unable to resolve will be settled by a particular arbitrator who is trusted by all the partners.
Challenges faced in managing partnership agreements
If your organization enters into lots of partnership agreements, managing them can become tedious. Partnership agreements are vital business contracts and you need to manage them carefully.
Some of the challenges you may encounter in creating and managing partnership agreements include:
- Delays in creating the partnership agreement.
- Lack of a central repository for all partnership agreements.
- Difficulty in tracking partnership agreements for review.
Why you should use digital contract management for partnership agreements
Strategic business partnerships may be the catalyst that will unlock business growth for your company. You need contract management software to make your partnership agreements more collaborative and seamless.
If your organization deals with high-volume partnership agreements, you need to automate drafting your partnership agreement. With contract management software, you can easily create modifiable templates which will help you generate partnership agreements swiftly.
Manage partnership agreements seamlessly
Like all contracts, a partnership agreement requires collaboration between the stakeholders. Some partnership agreements involve more than two partners. Contract management software provides you with a platform to digitally collaborate with all the parties to a partnership agreement. From creation to signing, all the parties can work together to achieve your business goals.
Have visibility in your partnership agreements
Your organization’s partnership agreement may be stored in different locations and difficult to locate. With a contract management solution, your partnership agreements will be stored in a centralized location thereby giving you visibility into all your partnership agreements.
Track your partnership agreements
With contract management software, you can better track your business partnership agreements. You can be notified when your partnership agreement is about to come to an end, and when you may need to review them.
Create partnership agreements with ease
Partnership agreements are important drivers of business growth. Contract management software will help you enter into partnership agreements with all your bases covered.
Ready to automate your partnership agreement from start to finish without touching a line of code? You can discover how Ironclad’s Workflow Designer is designed to help you to generate and sign partnership agreements seamlessly.
Table of contents
- What is a partnership agreement?
- Purpose of a partnership agreement
- How to create a partnership agreement
- Managing partnership agreements
- Challenges faced in managing partnership agreements
- Why you should use digital contract management for partnership agreements
- Create partnership agreements with ease