Partnership Agreement Review: 35 Provisions That Prevent Disasters

Each trigger can have different valuation methods and payment terms. A partner who dies should be bought out differently than one who quits to start a competitor.

Formula-based (multiple of earnings), appraisal-based (independent valuer), or agreed-value (updated annually). Avoid vague language like "fair market value" without defining who determines it.

A $2M buyout obligation payable in 30 days can bankrupt the buying partner. Define payment schedules, interest rates, and security requirements for deferred payments.

Cross-purchase life insurance for death triggers. A funded sinking fund for voluntary exits. Without a funding mechanism, buy-sell provisions are empty promises.

Before any partner can sell to an outsider, existing partners get the right to match the offer. Without this, your partner could sell their share to anyone.

If included: either partner can name a price, and the other must buy at that price or sell at that price. Forces fair pricing but can be weaponized by the partner with more cash. Decide in advance.

CA community property means a partner's spouse may have a claim on the business interest. Your agreement should require the divorcing partner to buy out the community interest, or give other partners the right to purchase.

Major decisions (selling the business, taking on debt, firing key employees, changing compensation) should require supermajority or unanimous consent. Day-to-day operations should not.

At minimum: sale of the business, admission of new partners, taking on debt above a threshold, changing the operating agreement, major capital expenditures, related-party transactions.

Options: mediator decides, independent board member casts tie-breaking vote, shotgun clause triggered, put/call option activated. Without this, a 50/50 deadlock leads to judicial dissolution.

Who runs what? Who can sign contracts? Who can hire/fire? Who can spend without approval? Vague authority creates daily friction and dispute.

Partner A can approve expenses up to $X without other partner's consent. Above $X requires joint approval. This prevents daily battles over operational spending.

Fixed amounts, formula-based (percentage of revenue/profit), or market-rate with annual review. If unequal, document the basis for the difference.

Quarterly distributions? Annual? When cash exceeds X? Pro-rata to ownership, or different allocation? Tax distributions (enough to cover each partner's tax liability from pass-through income) are critical.

In a pass-through entity, partners owe income tax on their share of profits whether or not they receive cash. The agreement must guarantee distributions sufficient to cover each partner's tax liability.

How is compensation changed? Annual review by mutual agreement? Tied to revenue growth? Based on comparable market data? Unilateral changes are a fiduciary duty violation.

Can the business require additional capital from partners? What if one partner can't or won't contribute? Is dilution the remedy, or default? This matters enormously in downturns.

CA Business & Professions Code §16600 voids most non-competes. But a duty not to compete WHILE a partner (fiduciary duty of loyalty) is still enforceable. Define what "competing" means for your business.

In CA, post-departure non-competes are generally void. Non-SOLICITATION of existing clients and employees may be enforceable if narrowly drafted. Don't rely on a broad non-compete — it won't hold up.

If a partner learns of a business opportunity through the partnership, must they bring it to the partnership first? The answer should be yes, and the agreement should say so explicitly.

Can partners invest in other businesses? Serve on boards? Do consulting? Define what requires disclosure, what requires approval, and what's prohibited.

Before any partner can file an arbitration demand or lawsuit, they must attempt mediation. This single clause has saved more partnerships (and more money) than any other provision.

AAA Commercial Rules? JAMS? Single arbitrator or panel? Location? Discovery scope? If you want arbitration, be specific. Vague clauses get litigated over their own meaning.

Does the loser pay the winner's attorneys fees? This discourages frivolous claims but also discourages legitimate claims from the less wealthy partner. Decide consciously.

California law? Federal? Which county for any court proceedings? Don't leave this ambiguous — it becomes a fight before the real fight.

What vote is required? How are assets distributed? Who manages the wind-down? What happens to employees? How are final distributions calculated?

Can a partner be expelled for fraud, breach of fiduciary duty, conviction of a felony, or material breach of the agreement? Define "cause" precisely.

What counts as "disabled"? Unable to perform duties for 90 consecutive days? 180 days in any 12-month period? Who certifies disability? What insurance covers the buyout?

Businesses change. Partners' life circumstances change. Tax law changes. An agreement drafted 10 years ago for a $500K business may be dangerously inadequate for a $5M business.

If a partner dies, is there enough insurance to fund the buy-sell? Has coverage kept pace with the business's growth in value? Policies should be reviewed annually.