CEO of Agency Management Institute, serving 250+ marketing agencies to help their owners build profitable agencies that evolve and scale.
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If you’re going into business with someone, the best thing you can do for yourself, your agency and your partner is to establish an agency partnership agreement. This document details each person’s respective role, expectations for the partnership, how finances will be handled and more.
While this might be considered a mundane paperwork task, you might run into trouble down the road if you don’t have one. After all, you’ll be working with another person with unique insights, goals and habits. One partner might want to go in a different direction down the line, and an agency partnership agreement will stop the relationship from ending badly.
At Agency Management Institute, I help agency owners through succession planning, which often includes internal sales and partnerships as the original owner transitions out of the business. The need for a partnership agreement often comes up during these discussions, but what exactly should you outline in the document?
I’ve compiled a list of the nine most important elements to include. By drafting up an agreement that covers the good, the bad and the ugly, you’ll save yourself lots of time, money and headaches in the future.
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The Good
Here are the must-haves for your partnership agreement:
• Name and Legal Designation
This is a basic necessity for the agreement. What is the name of the organization and its legal designation? This part defines who and what you are. You’ll also need to outline how the ownership is divided. If there’s room for this to change, it all needs to be clearly defined and documented.
• Clear Definitions of Roles, Responsibilities, Contributions and Authority
This section serves as a way to hold partners accountable because it gets everyone on the same page. If one party fails to uphold the expectations set at the beginning of the relationship, then both partners can have open and clear communication about what needs to be done. This section also helps everyone stay in their own lane.
• How Profits Are Handled
This section outlines the rules surrounding money. You need to clearly define how profits are handled, how losses are handled and how much loss you’re willing to tolerate before reevaluating your agency. It should also define who can take money out of the business, when they’re allowed to do so and how they go about that process.
The Bad
Here’s what you need in case things start to go downhill:
• Conflict Resolution Section
This section outlines what each party should do in case there’s conflict getting in the way of business. The best approach to conflict resolution is to clearly identify a third-party mediator. This can be a business coach, a counselor or someone you both trust who’s objective and has high emotional intelligence. The goal is to select someone who can come in and help you sort out your differences.
• Noncompete and Nondisparagement Clauses
Noncompete clauses are common. You probably already have one drafted for employee contracts. In the agency partnership agreement, this clause should state that whoever leaves won’t compete with the agency for a certain period of time in a certain geographic region. The nondisparagement clause should state that whoever leaves can’t speak poorly about the other partner.
• Instructions for if One Partner Leaves the Agency
This applies to either a voluntary or involuntary leave. Perhaps you have decided it’s time to retire and you’d like out. Or maybe your partner has done something that you find so egregious that you want them to leave the agency. No matter the circumstances, you’ll need to define what, when and how someone can leave in this section. In the case of involuntary leave, both partners will need to outline reasons why it would be triggered.
The Ugly
Here are three unfortunate situations you need to address in the document:
• Incapacitation of a Partner
No one likes to think about their friends, partners or loved ones getting hurt. But in the unfortunate event that one partner is incapacitated, you both need to know what to do. Establish how you’ll handle the agency if the incapacitation is from zero to three months, three to six months and longer than six months. This part of the agreement is also typically tied to your agency’s insurance policy. Talk to your provider and partner to determine what happens if one party is permanently incapacitated or passes away.
• Divorce Among Partners
This one is simple and straightforward. In the unfortunate event that partners end up getting divorced, the partnership agreement needs an addendum that states that the agency itself is off-limits in the divorce proceedings.
• Dissolution of the Agency
This is another straightforward but important component of the agreement. In this section, you can outline various scenarios that could lead to the agency’s dissolution, such as financial problems, retirement, etc. From there, decide how you’ll handle the process, who will get what and so on.
Now that you know some of the most important things needed in a comprehensive agency partnership agreement, you and your partner can start drafting one. Talk out any differences, and then work with an attorney to make it official.
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Author: Drew McLellan, Forbes Councils Member
