John Mahoney Mahoney Lawyers

Partnerships are like a marriage. They require compatibility to be effective. They need each partner to understand and respect the other. They produce great benefits when they work. Disputes, when they occur, can be traumatic and expensive, just like divorces.

There is no doubt that management rights partnerships are a very effective way of achieving substantially greater benefits for the individuals than they would be able to achieve separately the old one plus one equals three equation. However, it is essential that careful thought and planning go into any proposed partnership arrangement to ensure that the interests of all partners are protected and the potential benefit for partners is realised.

The following are what I consider to be the essential considerations for entering into a management rights partnership.

Structure: get thorough and professional accounting advice about the best structure from a taxation perspective. That applies to each individual party as well as to the overall entity. Generally, a partnership between the two parties (or their companies or trusts) is the best vehicle but there may be accounting or taxation reasons that lead to a company or a unit trust in which each partner has shares or units to be a more suitable vehicle.

Documentation: view this as a type of ‘prenuptial’ agreement. It should be designed not just to address how the partnership will operate in the good times but what is to happen in the bad times. It is essential to ensure that whatever structure is utilised, the terms and conditions of the partnership arrangements are properly documented. That might take the form of a partnership agreement, a shareholder’s agreement, or some form of joint-venture agreement. Whatever the case, have the arrangements properly embodied in a document by a lawyer with expertise in this area.

Fundamental terms: in the documentation there are some fundamental or basic elements that must be considered and documented. These include but are not limited to the following: The working arrangements and remuneration for that. Will both or only one partner work in the business? What remuneration is paid for that? It is common for the working partner to receive the caretaking salary in small to medium complexes. What are the living arrangements? Will the partner living onsite pay rent, body corporate levies, rates etc? Who will be required to hold the licence and is that permissible under the licensing laws and the letting agreement with the body corporate?

Duration: is a partnership going to be for a fixed period after which either partner can require the business to be sold?

Retirement or sale arrangements: what is to happen if one partner wants to retire? Does the other partner have the option to buy the retiring partner’s share? If so, is that based on a valuation or on the original purchase price? Can a partner sell to a third party without the other partner’s approval?

We have developed a partnership checklist that sets out all of the important issues that potential partners in a management rights venture need to consider and agree upon. It is an invaluable tool that we, and our clients, utilise to ensure that all relevant issues are addressed and properly documented in partnership agreements or other documentation.

Pitfalls

Just as many marriages end in divorce, a number of partnerships fail. Often the fallout is severe. I see the following reasons as to why partnerships fail.

Incompetence or inexperience of working partners: it can be difficult to assess the abilities of someone without specific experience in the area of management rights. It is essential to fully investigate a potential working partner’s abilities and experience to ensure that they can properly carry on the business.

Incompatibility: this might be financial, social, work ethic related or similar. One partner might have visions of substantial expansion of the business, which may necessitate considerable upfront expense, but the other partner might be satisfied to simply let the business run as it has been. One partner might want to take out all the profit without reinvesting it in promotion of the business or debt repayment, contrary to the wishes of the other. One partner might feel intimidated by the ability of the other. These issues need to be considered and investigated as best as they possibly can be, and discussed in an open and frank way before committing to a partnership.

Arrangements not documented: if the partnership arrangements have not been agreed to and documented, there can be dispute as to what the exact arrangements are. It is quite amazing how different partners can have totally opposing views as to what their undocumented arrangements are.

Poor, or no retirement or sale, provisions: it is often the case that disputes arise when one partner wants to retire or sell the business. In the absence of provisions in the partnership agreement dealing with these specific items, disputes can and usually do arise. Again, this highlights the importance of documenting these and other essential conditions.

I have regularly used the expression ‘do your homework thoroughly’ when talking to potential purchasers of management rights. The same applies to anyone considering a management rights partnership arrangement. Partnerships can and do work well in management rights if they are properly investigated, thoroughly considered from all angles and professionally documented.

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