The Importance of a Partnership Agreement Among Business Co-Owners

It’s common for owners of a growing business to be neck-deep in the work of maintaining the company. As the business grows, so do the tasks, and more often than not the company’s owners continue a “nose to the grindstone” mentality. They don’t take the time to define what it is they actually should be doing, continuing instead to do and fix everything themselves.

This has been true for John Sanders, Roy Morgan, and Gary Gentry, the three owners of Premier Christian Cruises. They have been so busy running the company that they have not defined their prospective leadership roles. This, in turn, has created inefficiencies in the business that could prevent the company from continuing its successful growth.

“I’ve found close to 75 percent of businesses that are partnerships don’t have a written partnership agreement and they don’t have the hard conversation to discuss when things aren’t working,” says David Finkel, a consultant who is advising the owners of Premier Christian Cruises on key strategies to grow their business. “Sixty-plus percent haven’t had consistent dialogue at least twice a year about the direction of the company and prioritizing roles in the business. Premier hasn’t had this discussion in at least 12 months, which can be deadly for a company that wants to scale and grow.”

The first step toward clarifying the roles of the business owners, according to Finkel, is to create a partnership agreement. The partnership agreement is a legally binding document that defines ownership of the company and protects each owner from anything that could happen to the partnership. In the case of Premier Christian Cruises, the agreement is doubly critical in that it must help define the exit strategy for each owner, since they’re at a different life stages. With Sanders at 37 years old, Morgan in his 50s, and Gentry in his 60s, it’s important for partners to define what each owner desires from the company in the present and future. For instance, Sanders, being the youngest, is motivated more toward continuing to build the company in the long term, while Gary is more interested in leaving a legacy of giving through the Premier Foundation, the charitable organization of Premier.

A lack of communication and clearly defined roles in the company has at times pulled the three owners of Premier Christian Cruises in multiple directions and prevented the company from growing as much as the owners would like, admits co-owner John Sanders. When it comes to booking entertainment and planning the company’s themed cruises, the owners frequently wind up communicating with employees through multiple, overlapping e-mail exchanges – an inefficiency that could be eliminated with more clarity among the owners about who handles specific parts of the business.

With a partnership agreement in place, a business can build such additional key documents as an operating agreement. An operating agreement further details the duties that each executive will carry out – and with that, everyone knows exactly which part of the business they should focus on.

“If you don’t have a clearly defined organization chart of who covers what, the operations department doesn’t know where to go to, since as an owner you haven’t directed them,” Sanders said. “We need to make sure our operating agreement is where it needs to be. Part of that is first creating an organizational chart that covers our roles.”

To create an operating agreement, Finkel advises first mapping out an organizational chart. At Premier Christian Cruises, such functions as cruise ship charters and artist booking have been performed by the owners in the past, but these functions have not been set as the responsibility of one specific owner or employee. Another duty that needs clear assignment through an organizational chart will be the negotiation of cruise ship charters. In addition to assigning responsibilities on the chart, Finkel recommends also creating a clear set of metrics to measure the performance of each person in charge of each newly assigned area.

In the process of developing an operating agreement, owners can identify the strengths and weaknesses of each partner, which can help make the business run smoother. The owners of Premier Christian Cruises recently identified their strengths and weaknesses: Morgan is good at negotiating talent for the ship charters; Gentry is great at salvaging relationships and smoothing over confrontational situations; and Sanders is great at coming up with new business ideas.

As the last step in creating a successful business partnership, Finkel believes, it is essential for the partners in a business to have regular retreats. Finkel says it’s crucial to meet at least twice a year -- preferably quarterly – so that the owners can gather outside the business to talk about big-picture goals of the company. In the past, the owners of Premier Christian Cruises would meet in person only at business-related events, which they admit were not very productive. Now they plan on meeting quarterly and setting time aside for regular phone meetings.

While Premier Christian Cruises grew into a successful company without a partnership or operating agreement, in order to grow into an even larger company, they’ll need improved communication and the legal agreements that can lay the foundation for future work.