This is a question that business partners and co-owners in limited liability companies (LLCs) often fail to address. You start a business, and everyone is committed to its success. All the partners are healthy and vibrant, and you are working 16-hour days just to get the business off the ground. So, the last thing you need to worry about right now is the death or disability of one of the owners, right?
Actually, this is exactly the time to address issues like these. Things happen over time; people age, health conditions develop, people get in fatal car accidents, and a number of other adverse events invade our lives. And if something were to happen to one of the owners or partners down the road, this could be disastrous for the business – if you are not prepared ahead of time.
If a business partner were to die or become disabled, there are a number of potential scenarios that would ensue:
- A Family Member Takes the Partner’s Place: Maybe you will be fortunate and someone in the partner’s family will be suitable to step up and take their place. This could be a spouse, child, or possibly a sibling. For this to work, however, the new person has to be qualified to take on the duties of the partner they are replacing and be acceptable to the other owners. It is very rare that this type of situation works out, but it is great when it does.
- A New Partner is Brought In: If there is no one in the family that can come in to work for the business, maybe you can find an outside person to buy the partner’s shares from them or their family. Again, the new partner would have to be qualified and acceptable to the current team, and motivated to join the team. This is often a very tall order, and definitely not something you should count on happening.
- The Other Partners Buy Out the Partner who is Gone: One of the most likely scenarios when one of the owners departs is that the other partners will want to buy out their interest in the business. This is often the cleanest way to do it, because you do not have to deal with someone new coming in and not being sure whether or not they will work out. To exercise his option, however, those involved will need to find a way to accurately value the outgoing partner’s shares and be able to raise the funds necessary to buy them out. Both of these issues can cause serious complications if they are not addressed in advance of an event like this happening.
- The Business Dissolves: The worst-case scenario is that there is no one to step in and replace the partner, and the other owners are unable to raise the money needed to buy them out. When this happens, the owners may have no choice but to dissolve the business, sell it to someone else, or sell off its assets. Having to sell or shut down could be devastating for the remaining partners who have put their heart and soul into building the business and want nothing more than to see it continue operating.
The Importance of Creating an Operating Agreement
Rather than being at the mercy of future circumstances, business partners are much better off addressing scenarios like the death or disability of a partner in advance. This is done by crafting a partnership/operating agreement. With this type of agreement, you would be able to set out the terms and conditions by which one of the partners could sell their shares. For example, you could restrict ownership to only the other remaining partners, or require approval of all partners before someone from the outside is allowed to buy in.
For the specific issue of a partner dying or becoming disabled, you could have a predetermined way of valuing their interest in the business, and a buyout clause stating that the other partners have first right to purchase their interest. To finance this purchase, the business could obtain keyman insurance on each partner.
Keyman insurance is life insurance that pays the business a death benefit if one of its owners or key members passes away. Some insurers also offer the option of adding disability coverage to the policy as well. With this type of insurance in place and predetermined terms and conditions regarding a partner buyout, partners never have to wonder what would happen if one of them dies or becomes disabled. They would already have a plan in place and the means by which to carry out that plan.
Operating agreements can be used to address a wide range of other issues related to ownership and operation of the business as well. For example, they can be used to decide how much money each partner is required to put into the business, the responsibilities of each partner and what areas of the business they are in charge of, when and how profits are to be distributed, time off and family leave parameters, the salary each partner is paid, and many others.
Although all the partners are usually working a lot in the beginning, there may come a time when one or more partners decides to take a step back, take time off, or work less. When this is the case, those who are putting in more work will most likely want to be paid extra to compensate for this. And this is another important area that operating agreements can address.
What is the Best Way to Develop an Operating Agreement?
An operating agreement is not something that can be thrown together on the fly. It is important to put a lot of thought into it, and the partners should take the time to discuss the essential areas that they want to have included. You could do this on your own using one of the boilerplate templates that you can get online, but this is probably not the best idea. Your business is unique, and the language in your operating agreement should be tailored to address your specific needs and circumstances.
Business partners often find it helpful to bring in a professional mediator to help them craft their operating agreement. Mediators are outsiders who have no vested interest in what the agreement will ultimately look like, and this gives them a perspective that none of the partners have. A mediator, and particularly one who also has extensive business experience, can also provide insights into areas and issues that the partners may not have considered. This helps them put together a more comprehensive agreement that effectively accounts of for all known eventualities.
Business partners inevitably run into conflicts. Disputes over money, employees you want to hire, products or services to offer, and numerous others are all part of the business landscape. When partners have a major dispute, it is not practical or cost effective to go to litigation. Legal action can cost thousands of dollars, and more importantly, going to court over an issue between the owners can do irreparable damage to the partnership.
A much better alternative that can help resolve conflicts between partners is mediation. Mediation is a voluntary process in which the partners meet with an experienced mediator to discuss the unresolved issues and work toward a win-win resolution. The process is facilitated by the mediator, but the partners are ultimately in control of whatever agreement gets worked out.
Can a Mediator Really help Resolve our Business Dispute?
This is a fair question, and one that is asked by many business partners. After all, if you have a dispute that has reached an impasse, you have probably already spent a lot of time discussing it and trying to figure out a solution. What can a mediator say or do that you have not already tried?
First off, a mediator brings an outside perspective to the situation that is neutral with no vested interest in the outcome of the dispute. This is a perspective that none of the owners have, and one that comes without judgment and without any preset agenda. Bottom line, the mediator will be able to see things from an objective point of view, allowing them to come up with ideas and potential solutions that you may not have considered.
Here are some other ways an experienced business mediator can help you with your dispute:
Allow the Partners to be Heard
A good mediator is a good listener, and this is very important when individuals are trying to work out a dispute. Oftentimes, business partners are so focused on defending their argument that they are not able to listen to what the other partners are saying. During mediation, everyone has a chance to voice their concerns without interruption. And when people feel like they are finally being heard, they tend to calm down and become more open minded to the points of view of others.
Encourage Open Communication between the Partners
Picking up on the previous point, the ability to speak freely and openly without judgment or interruption encourages much stronger communication between participants. This helps foster a friendlier and more cooperative environment; one in which partners often shift their mindset from defending their position toward wanting to help other partners get some of what they want. They may even start seeing value (that they had not seen previously) in what they were saying.
Help Establish an Agreement between Partners
One common issue that causes conflicts between business partners is the failure to put together a written agreement from the outset. It is understandable why this happens. Two or three individuals decide to start a business, and they spend 50, 60, even 80 hours a week in the beginning just to get the business off the ground. With so much going on, it is hard to find time for things like written operating agreements. But an operating agreement is essential for the success of the business, because it lays out, in writing, the important issues the partners decide between themselves regarding how the business will be run.
A business mediator can help partners put together an operating agreement before they begin operations, which is the ideal. But a mediator can help with this any time it is needed; and oftentimes, after dealing with a major dispute, partners begin to see first-hand the need for this type of agreement.
Improve your Business Operations
A good business mediator will most likely have a fair amount of experience in the business world themselves. And as an aside, this is an important attribute you should look for when deciding who should mediate your business partnership issue. During the course of mediation, the mediator can often provide ideas and solutions that have been proven to work in other organizations to help your business run more efficiently. And we all know that when a business is more successful, it significantly reduces the chances of conflicts down the road.
Give your Business a Proper Burial
There are some instances when the best thing for everyone involved is for the partners to go their separate ways. This is just reality. Some businesses are not meant to be, and some partners just cannot work successfully together. Once this has been decided, there are a lot of steps that must be taken to properly dissolve the business, or for partners to sell their interest in it. An experienced business mediator can help the parties negotiate the end of operations, so you can part peacefully and without any costly legal battles.
When partners go into business together, they must understand that occasional disagreements are inevitable. A business partnership is not unlike a marriage, and there are going to be times when the partners do not see eye to eye. Many disputes arise over money, how it should be spent, and other issues related to finances. At other times, there are operational conflicts, such as who is in charge of what areas, who has final decision-making authority, etc.
Fortunately, major business partnership disputes can be avoided, or their affects can be mitigated if the partners take proactive steps from the outset. Before beginning operations, you should create and adopt a written operating agreement that addresses, in advance, the known issues that are likely to arise down the road. It is best to do this ahead of time while everyone is friendly, level-headed, and on good terms.
There are several areas that should be addressed in an operating agreement, here are some of the most important:
- Capital Investment/Ownership Interest: How much is each partner going to put into the business? What percentage of ownership will each partner receive for their initial investment? And what if additional capital is needed in order to maintain operations until the company reaches profitability? Will the current partners commit to providing additional capital down the road? Or will they look for a loan or go to outside investors if more money is needed in the future?
- Decision-Making: As we touched on earlier, who will have decision-making authority over what areas of the company? And what about major decisions? Does there need to be a unanimous consensus before making certain decisions? How you make decisions as a partnership is one of the most consequential areas that will shape the direction of your business.
- Profit Allocation/Distribution: How will the partners be compensated for the work they put into the business? And when the company reaches profitability, how much of that will be paid to the partners, and how much will be reinvested into the company?
- Transitions: You need to cover scenarios such as expanding operations, taking on new partners, and partners who want to leave the business. And although no one likes to bring it up, you need to talk about worst-case scenarios such as the disability or death of one of the business partners.
- Dissolution: Another area no one likes to talk about is the possibility of having to close the business. But the time to figure out an exit strategy is now, while everyone is on the same page.
Dispute Resolution: When the inevitable dispute comes up, how will it be handled? Will one partner have the final say? Will it be resolved by the majority vote? Or will you bring in someone from the outside to help resolve it? Most disputes are minor and can be negotiated between partners. However, when it turns into a major conflict, you need to have a process in place that is designed to help bring the conflict to an amicable resolution without jeopardizing business operations.
Using Mediation to Create a Partnership Agreement
Developing an effective operating agreement that covers all the important aspects of your business is very difficult to accomplish with a “fill in the blank” template. Each business is unique and there is no “one size fits all” solution that applies to everyone. This is why bringing in an outside perspective to sit down with the partners as they craft the agreement can be very helpful.
A qualified business mediator can talk through the issues with the partners, digging deep and covering all known scenarios. The mediator will thoroughly analyze your specific business and operational plan, and they will not be afraid to ask the tough questions.
We cannot emphasize this enough, it is far better to tackle these questions now, before operations have begun. Otherwise, the partners may have too much emotionally invested in their points of view to be open to a rational resolution. This statement is not meant to demean anyone, it is simply human nature.
We are all vulnerable to letting our emotions get the best of us given the wrong set of circumstances. Early mediation is designed to help avoid these circumstances and produce better outcomes. This allows you to rest easy knowing that your business is in the best possible position to be successful.
One final point that is important to cover. When choosing a mediator to help put together your operating agreement, be sure to choose one who not only has extensive experience helping other clients develop these types of agreements, but also one who has “real world” business experience. A mediator needs to understand more than just how to help parties solve problems. They should have an in-depth understanding of the types of problems parties are likely to run into in the first place, so they have a better idea of which solutions are likely to be most effective.
Disputes within the workplace are common, and many of them are minor and can be resolved between the parties. When a conflict escalates, however, it can create major problems for the organization. The parties no longer get along, communication breaks down, and productivity suffers.
Major disputes like these cannot simply be ignored. If they are not dealt with, this could foster an increasingly toxic work environment in which morale is decreased and far more people throughout the organization are affected. Another possible result could be employment litigation, which can get very costly for everyone involved.
Most organizations have policies and procedures in place to resolve conflicts before they ever become legal issues. This usually involves a manager or supervisor attempting to resolve the dispute or having someone from the human resources (HR) department get involved. While this approach can sometimes produce positive results, that is not always the case.
There are some inherent flaws with having someone inside of the company deal with workplace disputes, the main one being the perception that the process is unfair. For example, if two coworkers do not get along because of a personality conflict and a manager steps in to try to resolve the dispute, at least one of the parties is likely to say that they are receiving unfavorable treatment. Whether this is really happening or not, an employee may be able to justify this perception by pointing to the fact that the manager has a closer relationship with the other coworker.
If there is a problem between an employee and their supervisor, this type of dispute is often dealt with by someone in the HR department. But even though the conflict is being handled by someone who does not work correctly with the two parties, the employee is still likely to perceive the HR person as part of “management” and therefore biased in favor of their supervisor.
Outside Mediation: A Better Way to Resolve Workplace Conflicts
These days, organizations of all sizes outsource a lot of their tasks. For example, they may hire an outside agency to produce an effective marketing strategy that will maximize ROI. They may also have an outside firm to handle their accounting and taxes, receive incoming calls, perform technical work, and many others. The main reason outsourcing these tasks makes good sense is that it allows organizations to leverage the experience and expertise of professionals who are able to produce far better results than if they hired someone to perform these tasks in-house.
The same holds true when it comes to resolving workplace disputes. An experienced mediator is far better qualified to resolve conflicts than someone inside the organization. A professional mediator handles disputes like these day in and day out, and their extensive training and experience has shown them the most effective ways to develop peaceable and workable resolutions between parties who have heated conflicts. This alone gives them a higher success rate than a typical manager or HR person.
As we alluded to earlier, another major reason outside mediators are typically more effective than someone inside the company is the fact that they are from the “outside”. These are neutral and impartial professionals who do not usually know the participants in the process and have no vested interest in the outcome. This allows the organization to show more credibly that their workplace dispute resolution process is fair for all employees.
Disputes are commonplace at work, and most are small and fairly easy to resolve. There are some disputes, however, that escalate to the point where those involved have a hard time working together and productivity is threatened. A major dispute that is not resolved can also lead to to more serious problems, including the possibility of a lawsuit being filed against the organization.
In most organizations, it is the job of the Human Resource (HR) department to resolve workplace disputes in a fair and equitable manner. This can be a major challenge, however, especially when employees do not believe they are being treated fairly during the resolution process. Even if an HR department is located off site and away from the location where the dispute occurs, there is an inherent perception among many employees that company officials have an agenda that favors one party over another, and that they are not really interested in delivering workplace justice.
To effectively address workplace disputes, all parties need to feel like the dispute is being handled in a neutral and impartial manner. For this to happen, it is generally best to bring in a third-party from outside the organization to help the parties resolve their issues. A professional mediator who is neutral and not part of the organization can help instill confidence among particpants that the process will be fair.
Advantages of Mediation for Resolving Workplace Disputes
There are several reasons why mediation (that is handled by an outside party) is among the most effective ways to handle workplace disputes. These include:
Outside Mediation avoids Conflicts of Interest
As mentioned earlier, one of the major challenges with having HR officials handle disputes is the perception that they are not neutral and impartial. Oftentimes, there is some truth to this notion. People in the HR department speak to and deal with employees regularly, and although they may try their best to be fair, they may know too much about the parties involved in a dispute to be truly objective. A neutral, third-party mediator will not have any preset agenda, and their only goal will be to help the participants reach a peaceable and workable resolution.
Mediation is a Cooperative rather than Combative Process
Mediation is a process whereby participants work toward a resolution that is acceptable for everyone involved. This involves understanding the point of view of the other parties and where they are coming from. It does not necessarily mean there will be full agreement on all points, and participants must be willing to give a little in reaching a solution that can work for everybody. The professional mediator facilitates the process and guides the discussion past the “he said, she said” finger-pointing in a way that maintains objectivity and helps participants find common ground.
Mediation allows Participants to Voice their Concerns without Fear of Retaliation
One major benefit of working with an outside mediator is that participants feel free to honestly express their reasons for the dispute without the worry of being reprimanded by someone in the organization. Mediation is a confidential process, and everything that is said stays between participants and does not become part of the company records.
Mediation allows Participants to take Ownership of the Results
Mediation is not the same as arbitration. Although it is facilitated by a neutral, third-party mediator, the process is voluntary, and the mediator has no authority to impose a resolution on participants that they do not agree to. Ultimately, participants are the ones who are in control of the outcome, and this makes it far more likely that they will be happy with the results and follow through with the final terms and conditions that are agreed upon.