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Partnership Agreements in Pharmacy Business (Part 2)

Have you considered using a partnership to structure your ownership interest in a pharmacy? Whilst a written partnership agreement may not be a legislative requirement, it is strongly recommended. In Part 1 of this article, published in the June edition, we discussed the benefits of documenting your partnership relationship and some key considerations when negotiating your partnership agreement. In Part 2, we continue highlighting the key clauses to include in your partnership agreement to ensure you and your business are protected.

Key clauses to include in your Partnership Agreement

Here are some essential clauses to consider including in your partnership agreement:

Decision-making clause

Decision-making processes are often a point of tension in partnerships as partners may have different ideas and visions. It is vital your partnership agreement establishes clear protocols to guide decision-making, avoid deadlocks and mitigate disputes.

The first step in establishing a decision-making clause is to identify the types of decisions that will be made throughout the lifetime of the partnership. These decisions may range from minor matters relating to the day-to-day operations of the business (for example, determining a partner’s remuneration, authorising tax returns) to more significant matters (for example, introducing a new partner, renovations or property acquisitions.)

Secondly, it is important to consider how each type of decision will be made, including which decisions can be made by the working partner and which decisions require collective agreement – either by majority agreement or unanimous agreement. And will votes be one vote per partner or based on ownership interest?

Finally, the partnership agreement should establish clear monetary thresholds for expenditure. Partners should know when approval is required, for example, to enter a contract or obtain a loan.

Contributions

Agree on what each partner is contributing to the partnership and state this initial contribution in your partnership agreement. Clearly defining contributions and ownership at the outset will help prevent disputes down the track.

What if additional capital is required? Consider whether further capital will be contributed by the partners in proportion to their contribution shares.

How will ownership be divided and will this evolve during the partnership? For example, you may wish to include an option for one partner to purchase a further interest after a specified period of time. This helps with succession planning.

Profit and loss distribution

Your partnership agreement should specify whether distribution of profits is based on ownership, performance or another factor altogether. It is most common for the net profits of the partnership (after payment of the partnership expenses and outgoings) to belong to the partners, allocated in proportion to their contribution shares. On the flipside, the partners usually bear all losses of the partnership, including losses of capital, in proportion to their contribution shares.

It is also important to consider the order in which the expenses of the partnership will be paid.

Dispute resolution

A partnership agreement requires a dispute resolution clause to ensure disputes are resolved efficiently. A dispute resolution clause usually sets out the following process:

  • Internal negotiation: a meeting between the partners and a requirement for the partners to use best endeavours to resolve the dispute in good faith.
  • Mediation: if the dispute is not resolved after a certain time period (for example, 30 days), the partners submit the dispute to mediation.
  • Expert determination or arbitration: if the dispute is not resolved within a certain time period (for example, 30 days) after the appointment of the mediator, the dispute is submitted to expert determination or arbitration.

Deadlock clauses are also valuable for partnerships with an equal number of partners. Where the partners fail to agree on a matter within a certain time, the partnership agreement should specify what happens next. We can assist with suggestions for this.

Penalties for early exit

Consider whether you would like to include a penalty for early exit clause. For example, if a partner leaves within a certain period after the commencement of the partnership, they are responsible for all costs and expenses in connection with the sale or disposal of their interest.

If you require assistance to draft or negotiate your partnership agreement, please contact the team at Vitality Law Australia on (07) 3112 0747. 

This article is intended to be for general information only. It does not constitute legal advice nor does it establish a relationship of client and lawyer. Specific circumstances or changes in law may vary the accuracy or applicability of the information published. We recommend seeking specific legal advice particular to your circumstances before taking any action, or refraining from taking any action, on any issue dealt with in this article.