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Partnership agreements - Are they needed or is it just fee creation?

By Frank Higginson02 Jun 2008

Partnerships within management rights businesses are becoming more popular. Primarily this is because they are a great opportunity for pooling of finances for silent investors and also open doors for resident managers who want to get into larger complexes but don’t necessarily have the equity required to meet the price tag.

A question we get asked quite regularly in management rights and other business matters is whether partnership agreements are required or where we are just creating work for ourselves. Sometimes that question does not come as directly, but certainly the intent is the same.

And the answer is without a doubt, that they are critical in any ongoing business arrangement involving arms length third parties, and especially where family is involved.

But that is easy for us to say, as we are the ones who make money out of them. Objectively, what are they for?

What we tell all clients is:

  • They should be ‘bottom drawer’ documents. Hopefully, once signed, they never see the light of day. That is the perfect partnership agreement.
  • However, if things do go wrong in the partnership relationship, which can occur, then without a partnership agreement it is too late to write the rules. If the relationship has soured you are left in no mans land when it comes to meetings, duties and the like. You have nothing to fall back on in terms of trying to bring an end to the issues in dispute.
  • The costs of drafting a partnership agreement, even a complicated one, are miniscule compared to the costs of fighting a legal battle without the rules imposed by a partnership agreement. Those hard costs are more than likely going to be far less than the opportunity cost and loss of value to the business that comes from an extended partnership dispute.

The partnership agreement acts as a form of insurance to save these costs and disputes getting ridiculously out of hand.

Even more important is the protection of the structure of the investment vehicles. If there is no partnership agreement, there is no certainty as to the true nature of the ownership of the assets. This can have very ugly tax consequences. Is it a company or trust? Is it a partnership of trusts? Who does what?

When disputes arise in these unregulated structures, the costs blow out very quickly.

Finally, the ultimate question is what do we do within our own firm. And the answer is that we have a written partnership agreement. It is normally the plumber who has the leaky taps, but in this case, the partners of our firm have decided that it is one of the best forms of insurance to have in place, because you never know what can or will happen in business.