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Forming a business partnership agreement

Listen in as we meet with a client who has requested that we assist in forming a business partnership. Our instructions are to prepare a contract, form a venture company and provide or obtain tax advice for the venture.

Preparing a business partnership (we'll use our broader term, "collaboration") is complex, challenging and rewarding work.

We'll open the meeting by responding that rather than focusing on any particular type or species of contract it is best to discuss the plans for the venture and practical considerations. The client smiles and replies: "That's why I'm here Noric, I want your advice." If you're still reading, remember this is not legal advice to you too, for that you too have to call me!

So we say that to achieve a good result it is best to discuss what the business will do, for who, at what price and achieving what results. Discussion along these lines takes 20 minutes. We ignore the appointment reminder blips on mobiles and the sound of incoming desktop emails.

collaboration_defined

Discussion continues with more specific questions and we promise to send a fill in questionnaire to extract additional post-meeting information from the client. Later, we locate a suitable questionnaire or two, customise them for the current job, and send them to the client. There's questions in it on the business model, financial model, how stakeholders are to be engaged and rewarded, and queries about the technology strategy for the venture.

A week later, we're now talking on the phone with the client having assessed the filled in questionnaire. This is a good client, one which gives good text! The client calls for a status update and we say we've now got quite a bit to go on as regards the venture's business plan, the assets and obligations of the busines and that we want to now review broader perspectives before locking in the type or species of contract that might suit the collaboration. The client asks, "Can't you just launch into drafting now?" We say, "You want advice? We have to think it through. OK?" The response is "OK."

We ask questions in subsequent phone calls and emails about how stakeholder interests are to be looked after and managed, and external allies and alliance partners to be treated. In conversation we bounce around a mix of possible arrangements, eg for buy-sell, licensor-licensee, rent-lease, rent to own, fee for service, payment on achievement of milestones and so on. We're testing what might work.

We want to know who among the individuals and entities in the core business and its wider enterprise circle will do what, when, and on what financial and other basis. It's a discussion that finally triggers advice on:

  • the differences in practical terms between different types and species of collaborative arrangements; and
  • the differences in legal terms between different types and species of collaborative contracts.

This helps the client make an informed choice about what contract to go with and what to put into it, including its practical attachments.

At this stage we advise that it may be feasible or appropriate to record progress for all parties in a short form contract or other document. Depending on the situation that document might be termed a heads of agreement, memorandum of understanding, deal points memo, terms sheet, or something else. Our instructions are to skip the step as so much has already now become clear. So we do.

Reflections

competition_rock_paper_sissorsDevelopment of new types of collaboration, and business models and contracts to support them, is at the evolutionary edge of intellectual property and business law. It calls for thinking across traditional professional silos.

Why have we walked you through the above procedure? The short answer is that practical considerations tend to smoke out theoretical or traditional humbug.

This is a longer answer. Lawyers and accountants do not normally include all the above steps and considerations in their business partnership formation project management process. This area of work is usually termed by them as "business structuring". Why don't they go further?

collaboration_hands_togetherOne reason is there are constraints in traditional university education, in the industry associations regulating professional bodies, in legislation for traditional professionals, in their professional indemnity insurance policies and ultimately in the perceptions and expectations of what clients as to what a lawyer or accountant can or should do. This feeds into what clients typically are prepared to pay traditional professionals to do. Such silo thinking and silo structures dominate and hold power in the center court.

Within these silo set-ups the job of forming collaborations and enterprise structuring is usually dumbed down to just business structuring. Hence the focus tends to be narrowly focused on legal or accounting issues, with a sharp focus on company structures, discretionary and unit trusts, taxation, liability limitation and legal entity or structure selection.

Punch line - the problem matters that come to us do not have problems connected with solely those areas of narrow focus. For a full range of problems there are technologists, management consultants, business planners, personal mentors and coaches, and a host of other consultants who can help clients. Few small or micro businesses realise that, or have the resources to engage such professionals. Their failure to take broader advice or counsel becomes evident in business failure. That's why in our firm, in the right matter, we describe and act as lawyers and consultants.


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