The Power of Partnership Charters for New Businesses
Business partnerships that rely on legal operating agreements alone to govern their internal operations are more likely to run into unsolvable problems down the road, New Orleans-based small-business lawyer Andrew Legrand says.
While these agreements are helpful when something goes wrong with a partnership, they don’t discuss the future of the business or how the partners will work with each other to achieve success. That, Legrand says, is the job of a partnership charter, which is a structured process for business partners to shape their own agreements on all aspects of their relationship.
Legrand, the founder of Spera Law Group in New Orleans, has centered his practice largely around the concept of partnership charters. He says most attorneys focus exclusively on the legal language of operating agreements and ignore the notion of fairness and relationships when dealing with partnerships. His approach was heavily influenced by the book “The Partnership Charter: How To Start Out Right With Your New Business Partnership (Or Fix The One You’re In)” by David Gage.
“What I’ve found in business partnerships is that it’s all about fairness,” he says. “For a partnership to work, both sides of the transaction need to be getting something out of the relationship to where they feel like it’s fair. If it’s not fair, that relationship is not going to work.”
Legrand broke down the three main pieces of the partnership charter process during a recent Tech Park Academy event at the Louisiana Technology Park. Here’s a look at some of what he shared.
Legrand says the process of developing a partnership charter typically unfolds over several months, and while it ultimately produces a non-legally binding document that partners can rely on internally, the end result is not necessarily the most important part of the process. “The magic is the process of helping the partners talk about the business and understand where they want to take it,” he says.
The first step in the charter process is to determine the vision, values and styles for all the partners in the venture. This often-overlooked step starts with your vision for the company, he says, including specific financial goals, salary expectations and feelings toward debt.
Next, Legrand says his firm puts partners through multiple personality tests to help them understand what they are motivated by and what they want out of their business ventures. Finally, the charter helps partners better understand how they interact with others, including their communication and decision-making styles.
Nuts and Bolts of the Relationship
Legrand's partnership charter workbook goes to great lengths to evaluate the contributions that partners are likely to contribute to the business, such as skills, assets, expertise and more. He says most business partners want to divide ownership equally, which often leads to personal conflicts down the road. “The problem with that is if you’re the person contributing a lot more, eventually you’re going to feel like it’s not fair,” he says.
The charter process also clearly defines roles within the company by spelling out what those positions will actually be required and allowed to do. Legrand says defining who has authority and accountability — such as how many people can receive or disburse funds — can help avoid power struggles, employee confusion and negativity that can derail a business. “A lot of people like to assign titles,” Legrand says. “The hard part is figuring out what the titles actually mean.”
This part of the charter deals with ownership and control — which Legrand points out are two separate things — as well as how ownership will change with time and circumstances. It also deals with spending habits, income needs and philosophies on borrowing money for the business.
Planning for Success
In this section of the process, partners think about specific scenarios their business might face — everything from what happens when a partner wants to walk away to the consequences of receiving a multimillion-dollar order that requires a rapid scale-up.
The charter at this point spells out expectations each partner has for the others to prevent surprises as the business progresses. This section also includes guidelines for dealing with out-of-the-ordinary events, whether personal or business-related, and it aims to help partners prepare for disagreements by sussing out their conflict-management style.
At the end of this process, Legrand says the partners should step back and evaluate whether the document they’ve drafted is fair for all parties involved. “It’s all about that fairness and making sure we get along so we save that relationship,” he says.