Turning a Handshake Deal Into a Contract Before It Soured

The situation

Khalil worked as a grocery clerk and Yasmin drove for the regional transit system. Two years earlier, on a slow weekend, they had started buying surplus produce and turning it into prepared meal kits they sold out of a rented commercial kitchen to a rotating list of local customers. It began as a way to make an extra few hundred dollars a month. By the spring, it had grown into something else entirely: a standing customer list, a delivery schedule, and revenue that had crossed roughly $100,000 over the past year.

Somewhere along the way, a friend named Zainab had started helping out. She handled weekend deliveries and, more recently, had taken over sourcing ingredients from suppliers. The three of them had never written anything down. Khalil and Yasmin considered themselves the owners since they had started the business and put in the initial money for equipment. Zainab considered herself a partner, since she had been putting in full weekend days for nearly a year and had brought in two of the business's largest recurring customers herself.

Nobody had defined what "partner" meant. Nobody had agreed on how profit was split, what happened if one person wanted out, or who actually owned the business name, the customer list, and the equipment sitting in the rented kitchen. It had never come up, because there had never been a reason to ask. That was about to change.

The problem

Khalil and Yasmin came to Treadstone Law not because of a dispute, but because their accountant had asked a question they couldn't answer: who legally owns this business? The three of them were operating as an unregistered partnership by default, whether they had intended to or not. Under Ontario's Partnerships Act, when two or more people carry on a business together with a view to profit, a partnership exists in law even without a written agreement or a formal registration. That default partnership comes with consequences none of them had considered.

Without an agreement, several things were left entirely to chance. Profits and losses in a partnership are shared equally by default, regardless of how much money or time each person actually put in — which meant Zainab, despite contributing labour and no capital, could have a claim to an equal one-third share. Any partner can generally bind the partnership to contracts and debts made in the ordinary course of business, meaning a bad supplier deal signed by any one of the three could expose all of them. And critically, if one partner left, died, or wanted to be bought out, there was no agreed mechanism for valuing their share or paying it out — that kind of dispute typically ends up litigated, with legal costs eating into whatever the business is worth.

The specific trigger was smaller and more human: Zainab had recently asked, almost in passing, what would happen to "her share" if she cut back her hours to take a full-time job she'd been offered. Khalil and Yasmin realized they had no answer. That uncertainty was the real risk — not because anyone was acting in bad faith, but because a $100,000 business with three sets of hands on it and no rules was a dispute waiting for a reason to happen.

What we did

1. Mapped out what each person had actually contributed. Before drafting anything, we asked all three to separately describe, in their own words, what they believed their role and stake in the business was. The gap between Khalil and Yasmin's understanding (two owners, one helper) and Zainab's (three roughly equal partners) needed to be surfaced and discussed before it could be resolved on paper — a written agreement can only formalize an agreement the people involved have actually reached.
2. Facilitated a structured conversation about ownership. Rather than drafting terms unilaterally, we ran the three of them through the specific questions a partnership agreement needs answered: who owns the business name and customer relationships, how profits are split, what happens if someone reduces their hours or leaves, and how a partner's share would be valued and paid out. This conversation, done calmly with no dispute on the table yet, let Zainab's contribution be recognized fairly without anyone feeling cornered into a number.
3. Recommended incorporating rather than continuing as an informal partnership. Given the revenue level and the fact that the business would keep growing, we advised setting up an Ontario corporation under the Business Corporations Act (OBCA), with Khalil, Yasmin and Zainab as shareholders in proportions reflecting their agreed contributions. Incorporating separates the business's debts and liabilities from the three individuals' personal finances — a meaningful protection once the business was signing supplier contracts and hiring occasional help.
4. Drafted a unanimous shareholders agreement. This is the document that does the real work: it set out each person's ownership percentage, how major decisions would be made, what would happen if a shareholder wanted to sell their shares or left the business, and a formula for valuing a departing shareholder's stake based on the business's recent revenue and assets rather than an emotional negotiation after the fact.
5. Built in a buy-sell mechanism specifically for Zainab's situation. Because she had raised the possibility of reducing her hours, the agreement included a specific process for a shareholder moving to part-time or full exit: advance notice, a valuation method, and a payment schedule so the business wouldn't have to find a lump sum overnight.

The outcome

Four months after the agreement was signed, Zainab accepted the full-time job she had mentioned and gave notice that she wanted to step back from the business entirely rather than stay on part-time. Under an informal handshake arrangement, this is exactly the kind of moment that turns into a dispute — a departing partner and two remaining ones, all with different memories of what was promised, and real money at stake.

Instead, the exit followed the process already agreed to. The business's revenue and assets were reviewed against the valuation formula in the shareholders agreement, arriving at a buyout figure of roughly $18,000 for Zainab's shares, paid out over an agreed schedule rather than as one disruptive lump sum. The entire conversation took place over a single meeting between the three of them. There was no negotiation over what was fair, because fairness had already been defined while everyone was still on good terms. Zainab left the business with her payment on schedule and remained friendly with Khalil and Yasmin, who kept the business — now fully theirs — running without interruption or legal cost.

The value of the work wasn't in resolving a conflict. It was in making sure the conflict never had room to happen. A dispute over a $100,000 business, contested without an agreement, could easily have cost more in legal fees than the business itself was worth that year — to say nothing of the damage to a friendship and the operational disruption of a fight over ownership mid-season.

What you can learn from this