Getting the Most out of a Partnership Agreement

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 810 words

A partnership agreement earns its keep when it answers the hard questions before anyone needs to ask them: who puts in what, who decides what, how money comes out, and what happens when a partner dies, leaves, divorces or wants to sell. Most fights between co-owners start with something the agreement never covered, or covered so vaguely that each side reads it differently.

Depending on how the company is organized, the document may be a partnership agreement, an LLC operating agreement or a shareholder agreement for a corporation. The questions are the same. Your business attorney drafts it; this article sets out what an owner should insist it covers, especially if a sale of the company is ever likely.

The basics every agreement should settle

• Contributions. What each partner puts in, whether cash, equipment, customers or work, and what happens if the business later needs more capital and one partner cannot contribute.
• Ownership. Each partner's percentage and the only ways it can change.
• Authority. Who runs daily operations, and which decisions need every partner's approval, such as borrowing above a set amount, signing a long lease, hiring senior staff or selling major assets.
• Pay and distributions. Salaries or draws for partners who work in the business, how remaining profit is distributed, and whether cash is paid out to cover each partner's taxes on company income.
• Deadlock. What happens when partners with equal votes cannot agree: mediation, an outside tie-breaker or a buyout mechanism.

The exit terms owners skip, and later regret

The most valuable part of the agreement is usually the buy-sell section, which sets the rules for when one owner's interest must or may be bought by the others or by the company. Common triggers are death, long-term disability, retirement, divorce, a partner being fired for cause and personal bankruptcy. Without these rules, a partner's heirs or ex-spouse can end up as your co-owner.

Just as important is how the price is set. A fixed price written into the agreement at founding is almost always wrong a decade later. A formula based on earnings can work if it is defined carefully. Many agreements instead require an independent appraisal when a trigger occurs, which is slower but harder to dispute. The agreement should also say how the buyout is paid for, whether through life or disability insurance, installments over several years or a mix.

A right of first refusal, which gives existing partners the chance to buy a departing partner's share before it can go to an outsider, keeps ownership inside the group.

How the agreement shapes a sale of the whole company

When a buyer arrives, their attorney will read your agreement early in due diligence. What they look for is whether the sale can actually be approved and completed. Three clauses matter most. The approval clause says what vote is needed to sell the company. A drag-along clause lets owners holding a set majority require the others to sell on the same terms, so one holdout cannot block the deal. A tag-along clause protects minority owners by letting them join any sale on the same terms.

Whether the buyer purchases the company's assets or the owners' interests also changes who signs, who receives the money and how it is taxed. Our answer on selling assets or ownership interests explains the difference, and your CPA and attorney decide which fits.

What it costs to go without one

Partners who start a business as friends or relatives often skip the agreement because it feels like planning for a divorce. Then something changes: one partner stops working, another wants to bring in a son or daughter, someone needs cash. A dispute that reaches court drains money and management attention, unsettles employees and gives competitors an opening with customers. A company in litigation between its owners is also extremely hard to sell, because no buyer wants to inherit the fight. A few hours of attorney time now costs far less.

Agreements also go stale. One written at founding rarely fits a company that has since added partners, grown several times over or become part of someone's estate plan. Review it every few years, and again before you begin planning an exit. If the buy-sell price depends on a valuation, a formal business valuation prepared by an independent professional gives everyone the same number to work from.

Where MDR & Associates comes in

MDR & Associates is not a law firm and does not draft agreements. It works alongside your transaction attorney and CPA. During pre-exit consulting, which covers the 12 to 24 months before a sale, the firm looks at whether the owners agree on price, terms and timing, and whether the ownership documents support a clean sale. When offers arrive, each one is presented in person so every owner decides with the same information. To start that conversation, contact the firm.

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Questions owners ask next

What is a fair way to set the price in a buy-sell agreement?

Most attorneys steer clients away from a fixed price that nobody updates. The two common alternatives are a written formula tied to earnings, reviewed periodically, or an independent appraisal when a trigger event happens. The appraisal is slower and costs money, but it is the hardest to dispute.

Can a partner sell their share to an outsider?

Only if the agreement allows it. Many agreements require consent from the other partners or give them a right of first refusal to buy the share first on the same terms. Without any restriction, you could end up in business with someone you never chose.

What happens if we never signed an agreement?

State default rules then govern decisions, profit sharing and what happens when a partner leaves, and they may not match what you intended. Ask your business attorney to review your situation and put a written agreement in place while everyone still gets along.