A partnership agreement is a formulised document that sets out the terms under which business partners operate. 

It typically covers aspects such as financial contributions, profit-sharing arrangements, roles and responsibilities, decision-making processes and exit strategies. 

Having a written, signed partnership agreement ensures that all partners are aligned in their expectations and obligations.

This type of agreement is particularly beneficial to small business operators, including private practice owners, who wish to share responsibilities and financial risks with others. 

It suits professionals who prefer collaboration to sole proprietorship and want to create a structured business arrangement with clear guidelines.

Much like a prenuptial agreement in a marriage, a partnership agreement can act as a safeguard to protect the interests of all involved. 

By outlining each partner’s rights and responsibilities and the procedures for handling potential disputes, a well-crafted agreement provides clarity and structure.

There are several advantages to partnership agreements including risk reduction, legal clarity and effective dispute resolution.

However, there are also disadvantages such as potential conflicts between partners and the need for ongoing negotiation and review as the business evolves. 

Without a well-defined agreement, misunderstandings can arise, leading to disruption in business operations.

Allow for all possibilities

Having been through the partnership agreement process himself over the past two decades, Errol Lim APAM, a physiotherapist and the managing director of BJC Health in Sydney, believes that trust and honesty are fundamental elements in constructing any partnership agreement.

Errol Lim.

‘As we know, a large proportion of marriages fail. It’s similar in business; most partnerships fail. So the partnership agreement is to allow for that,’ Errol says. 

‘While no one enters a partnership agreement thinking it will fail, the reality is that not all arrangements are successful.’

In 2006–07, Errol and his brother Irwin merged their business interests and took on a third partner. 

It was then that discussion about formalising a partnership agreement first began. 

Over the next two decades, Errol’s knowledge and understanding of partnership agreements evolved significantly. 

Partners in the business came and went and the business saw periods of growth and change. 

During that flux, the partnership agreement was adapted to reflect the changing circumstances, Errol says.

Have the hard conversations

The process of creating a partnership agreement can be an uncomfortable one, Errol says. 

For starters, it involves having a lot of difficult conversations. What happens if one of the partners dies or suffers permanent and total disability? 

Are family members of a partner able to step in if the partner dies or is incapacitated? What happens if one partner wants to dissolve the partnership? And how do you navigate the addition of new partners?

‘You just have to discuss it. There’s no other way. 

'If you’re going to be a business owner and you have leadership positions where you’re controlling an entity and you have responsibility and governance over the organisation and staff, eventually you have to have these conversations anyway,’ Errol says. 

‘You’re going to have similar discussions with your parents before they pass, about wills and probate. 

'It’s the exact same discussion about work but they are conversations that maybe 80 to 90 per cent of the human race doesn’t want to have.’

Uncomfortable as they may be, these discussions are an essential step in clearly defining the terms of the partnership agreement, Errol says. 

Beyond financial considerations, any partnership agreement should also address partners’ evolving roles. 

While he acknowledges that it’s not possible to capture every single scenario in an agreement, Errol says what does work is constant communication and transparency. 

‘The longer you avoid difficult conversations, the harder they become to resolve.’

To maintain a healthy partnership, Errol and the other business owners hold quarterly meetings to discuss business and any ownership issues. 

There are currently nine owners and four directors (the latter meet more often) and an executive team that addresses operational strategy. 

Errol says that it would be ideal if a business could be structured in a way that allows it to operate independently. 

‘The idea is to have a model where ownership does not necessarily require daily involvement.'

A crucial aspect that Errol highlights is ensuring that spouses or family members do not interfere with business operations if they normally have no involvement in the business. 

‘We were clear from the start; if I were to pass away, my shares would be handled by my estate but my spouse would have no say in the running of the business,’ Errol says.

Get the legalities right

Andrew McKenzie (right), a lawyer with extensive experience in partnership agreements in his role with APA corporate partner Maurice Blackburn, stresses the importance of consulting a lawyer early in the process of creating a partnership agreement.

Andrew McKenzie.

‘One of the biggest mistakes you can make is not confirming whether the person you are negotiating with has the authority to make binding decisions,’ Andrew says. 

‘Ensuring that the agreement includes the correct legal entity name is also critical.’

Timeframes, Andrew says, are another key component to consider when shaping any partnership agreement. 

‘Clearly defining the start and end date of the agreement, along with regular review periods, ensures transparency and accountability,’ he says. 

‘Exit clauses should be detailed, specifying notice periods and conditions under which a partner can leave or be removed.’

Financial considerations such as profit distribution and buyout procedures must also be addressed, Andrew says. 

‘People often underestimate the complexity of valuation methods for partner buy-ins and exits. 

'Having a clear formula based on EBITDA [earnings before interest, taxes, depreciation and amortisation] or another fair metric is essential.’

Revisit your arrangement

A well-structured partnership agreement provides a solid foundation for business success. 

By addressing financial structures, roles, dispute resolution mechanisms and exit strategies, partners can mitigate risks and foster a collaborative work environment. 

Regularly revisiting the agreement ensures that it remains relevant as business dynamics evolve.

Communication is key to maintaining a strong partnership agreement, Errol says. 

‘Be open and honest from the beginning. Have the difficult conversations early and revisit them regularly. 

'Business partnerships, like marriages, require continuous effort and adaptation.’

Andrew agrees, reinforcing the importance of foresight and diligence. 

‘Don’t rush into a partnership agreement without thinking through every aspect,’ he says. 

‘Make sure you understand the legal and financial implications before committing.’

Ultimately, partnership agreements are more than just legal documents—they are essential tools that help business owners navigate challenges, align their goals and create a sustainable future for their practices.