Let’s face it, you need every break you can get when starting or expanding a business. One oversight that gets businesses into trouble is not having written agreements with business partners. Written agreements are essential for creating general partnerships or multiple member limited liability companies and for relationships with financial investors. The lack of clearly written agreements can eventually lead to dysfunctional management and possibly early business closure. When it results in fighting partners or unhappy relatives you have a disaster.
The case for solid business agreements should seem pretty obvious. So why do people ignore the obvious and continue to ‘tie the knot’ with business partners without them?
One reason: business partners are frequently close friends or family members. Owners enter into oral or handshake agreements and think they both have the same understanding of what they just agreed to. Most likely their perceptions differ, and the realization of this only comes after work has been performed and problems arise. The belief that because they know each other makes written agreements unnecessary is frequently wrong.
Another reason: fear that suggesting written agreements in close relationships might be embarrassing or seem like a betrayal of trust. Good relationships stand the test of exploring agreements and disagreements, and putting them on paper. If it strains the relationship, they probably shouldn’t be in business together.
The process of having good business agreements starts by talking with each other. This helps identify how to do business together and what should be in the agreement. It helps identify areas of potential disagreement and avoids the need to solve these things later.
Some things that partners might include in a written agreement are:
• How decisions are made. The daily operation of the business sometimes requires prompt decisive action.
• How work is divided. When one partner thinks they are working harder than the other there will be conflict. Clear descriptions of the work each partner will be responsible for are needed.
• How long the agreement lasts. Even if business owners remain on good terms, death, disability, divorce or other life changes are common. If there is no written agreement in place to protect the other owner, disasters can occur. Unintended consequences like children, heirs or former spouses having an involvement in the business can result.
• How the finances are handled. Identify each partner’s investment, percentage of ownership and compensation. Also identify how banking and recordkeeping will be handled. Keep in mind that profits as well as losses will be shared.
• How disagreements are resolved. It will be beneficial for your business agreement to identify a dispute resolution process. This might include mediation .
When problems arise the best thing is to do is keep talking. Most people are initially willing to extend some measure grace. But that grace quickly ends when communication stops.
Forrest Peck is the MERIT Program Director at the Chemeketa Small Business Development Center. This column is produced by the center and appears each Sunday. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High St. NE or call (503) 399-5088.