Why Operating Agreements are Important at All Stages of a Business Partnership

Why Operating Agreements are Important at All Stages of a Business Partnership

All too often, business partnerships are created without a formal operating agreement. In many cases, the partners are good friends, or they at least know each other fairly well, so they figure they can trust each other and there is no need for a written document. As time goes on, the business grows and evolves, and perhaps some new partners are added.

Even if the business has been established for a while and you do not yet have an operating agreement, it is never too late to formalize the important aspects of your business to help ensure its long-term viability and stability. And if you already have an operating agreement in place but it has been several years since you reviewed it, it is a good idea to revisit the agreement and make sure it still makes sense for where your business is currently at.

What Should be in a Partnership Operating Agreement?

An operating agreement is a document that specifies how a partnership should be governed. This agreement covers important areas such as:

  • The name and principal place of business of the partnership;
  • The purpose and mission of the business;
  • The roles, responsibilities, rights, and powers of each partner;
  • The amount of money each partner will contribute (during the startup and potentially during expansion phases);
  • How money will be spent;
  • Methods of distribution for profits and losses;
  • Operating guidelines for various parts of the business;
  • Methods for keeping records;
  • Buyout provisions if one of the partners wants to leave;
  • Provisions for continuing the partnership if one of the partners passes away;
  • Methods for dispute resolution if a dispute arises;
  • Steps that should be taken if the partnership has to be dissolved.

There are many other terms and conditions that you may want to include in the partnership operating agreement. Many of these will depend on the type of business, the industry you are in, the size of your business, the number of employees you have, and other specific factors.

How often Should Partnership Operating Agreements be Reviewed and Revised?

Implementing an operating agreement is a good step toward solidifying your business operations.  But this is not the end of it. As mentioned earlier, businesses change and evolve over time.

Partners sometimes leave, and new partners are sometimes added. The growth of a partnership may even necessitate changing to a different entity structure, such as a limited liability company (LLC) or a corporation.

When major changes occur over time, operating agreements tend to become outdated. For example, I recently dealt with a partnership whose operating agreement was from 1998. For roughly two decades, the partners never reviewed or updated their agreement. This particular agreement had no clause for either of the partners to buy the other one out if one wanted to leave.

This created a big mess when one of the partners decided they wanted out of the business. Had they addressed this issue in advance, they would have known how this scenario is to be handled, which would have allowed for a much smoother transition.

So, how often should an operating agreement be updated? There is no hard and fast rule that applies to every situation, but that being said, it is always a good idea to revisit your operating agreement at least every few years. And if the business undergoes any big changes, this is definitely a good time to update the agreement.

The Advantages of Mediation for Creating or Revising an Operating Agreement

Developing a partnership operating agreement can be complicated, and there are numerous issues that need to be addressed. One of the best approaches to handling this type of agreement is through mediation. With mediation, partners sit down together to discuss the potential issues they may face. This discussion is guided by a third-party mediator.

Working collaboratively, the partners can iron out the important operational issues agreeably and in a way that makes the most sense. It is much better to do this ahead of time when partners are more likely to take a rational and logical approach, rather than in the heat of a battle when emotions can tend to get the best of you. The mediator you choose should also be one who has extensive business experience and in-depth knowledge of the types of issues partnerships typically face.

Mediation is one of the most effective and cost-efficient ways for business partners to set up an operating agreement. And once all the partners have agreed to everything in principle (through the mediation process), all that is left is for an attorney to draft and review the document to make it legally enforceable.

How Human Resource Departments Benefit from Workplace Mediation

How Human Resource Departments Benefit from Workplace Mediation

A large number of organizations are set up to have employee complaints handled by the human resources (HR) department. When an employee is having a problem with a coworker or supervisor, they are typically told to file a complaint with HR, and from that point, HR is supposed to investigate the complaint, address the matter, and resolve the situation.

Unfortunately, this process is confusing for many employees, and some do not believe that they will get a fair shake from their HR department. HR is viewed as another branch within the company, which it is. This can be problematic for employees who have disputes, particularly when they have a complaint against someone in management.

How do they know that their issue is going to be taken seriously? And how do they know that they won’t experience negative repercussions after they report the issue? Employees are naturally skeptical about this type of process, and as a result, many choose not to go this route.

They may decide to do nothing about the problem and just live with it, making them unhappy with their work environment. On the other hand, they may decide that things are so bad, they need to take legal action against the organization. Either way, this can quickly become much costlier for everyone involved.

Using Mediation to Resolve Workplace Disputes

Mediation is not a threat to HR professionals. Rather, it serves as an essential first step toward proactively resolving employee disputes. A growing number of human resource departments are adopting workplace mediation as an effective solution to handle employee complaints and disputes. Human resource professionals are now coming to view outside mediators as partners in the dispute resolution process.

Mediation can be an invaluable resource for HR departments, because it provides a way for employees to have their issues fairly addressed. This process can help with a wide range of workplace issues, such:

  • Differences over culture and values in the workplace;
  • Personality clashes;
  • Coworker disputes over various work processes;
  • Employee complaints about unfair performance reviews;
  • Other various disputes between employees and managers/supervisors;
  • Initial harassment complaints based on miscommunication or misperception.

It is important to note that, although mediation is a useful tool to effectively address many workplace issues, it is not a replacement for the formal complaint and grievance process. Some issues, such as instances of real harassment, discrimination, and other civil rights violations may require a more formal remedy.

The Advantages of Workplace Mediation

There are several benefits for HR departments that provide workplace mediation for their workforce:

  • Impartiality: The process is facilitated by a neutral, third-party mediator who is not employed by the organization and has no vested interest in the outcome of the proceeding. This gives employees the assurance that they will be participating in a process that is fair and impartial.
  • Recognition: Employees have the opportunity to air their grievances in a confidential setting in which they can feel safe and comfortable honestly expressing their point of view. During the process, employees feel like they are being heard, and they also have the opportunity to hear and try to understand the other party’s point of view. This greatly increases the chances of developing a peaceable and workable resolution.
  • Empowerment: Although it is facilitated by an outside mediator, the process is voluntary, and participants are ultimately in control of the outcome. This gives employees the opportunity to reach a resolution based on their direct input, rather than having the outcome decided by someone else (like they are used to on the job). Because of this, when a resolution is reached, employees are more likely to take ownership and adhere to whatever is agreed upon.
  • Cost Effectiveness: Mediation is cost-effective not only from the standpoint of avoiding a potentially expensive legal action, but also because it allows organizations to address complaints and disputes early on and before they become much bigger issues. This helps foster a happier and more productive work environment.
  • Timely Resolutions: Mediation can be completed in a relatively short period of time, often in just a few hours. This is typically much quicker than having an employee go through a formal complaint process, or worst-case scenario, a protracted legal proceeding.
Mediation for Management Tensions in the Workplace

Mediation for Management Tensions in the Workplace

Tension in the workplace is inevitable. Individuals from all backgrounds and walks of life come together within organizations to work productively and move themselves and the organization toward greater successes. With so many different personalities, perspectives, and worldviews, there are bound to be clashes.

Most workplace conflicts are relatively minor and can be worked out between the parties involved. Sometimes, however, emotions run high and tension increases. When conflicts escalate and tension rises, it can create chaos and pose a threat to the stability of the department, and sometimes to the organization as a whole.

Major conflicts come at a high cost for organizations. A 2013 study that was published by the National Institutes of Health found that employees in the U.S. spend an average of nearly 3 hours per week dealing with workplace conflict, resulting in approximately $360 billion in lost productivity.

Conflicts between employees can sometimes be resolved by a manager, although this is not always a good idea as office politics and accusations of “playing favorites” can make the problem even worse. But what happens when the conflict is between an employee and their manager?

Tensions with management are especially frustrating for employees. When an employee and manager butt heads, the employee often feels like they are not being given a “fair shake”. This can even lead to accusations of workplace harassment, discrimination, and other civil rights violations. This puts managers in a delicate position, because they are rightfully seen as having an inherent bias, which makes it very difficult for them to handle the situation without the employee feeling slighted.

Resolving Management Tensions through Mediation

Before the situation becomes even more toxic and the organization runs into a potential legal problem, it is best to consider an alternative means for handling an employee-manager conflict. One of the best ways to handle this type of dispute is through mediation.

Manager-employee mediation is facilitated by a neutral, third-party mediator. Ideally, the mediator is someone from outside the organization who has no vested interest (perceived or real) in the outcome of the proceeding. The mediator should be a highly-trained professional with extensive experience working with organizations and handling these types of disputes.

Workplace mediation is an increasingly preferred method for resolving all types of conflicts within organizations, because the process is less costly than a court proceeding, and the participants are often able to resolve their disputes without any further escalation.

Mediation for management tensions provide several advantages for organizations, these include:

A Collaborative Process: Mediation is done in a cooperative rather than combative environment. Participants are encouraged to work together toward a peaceable arrangement that all parties can live with. Until there is a change in jobs, the manager and employee must continue working together after the process is completed, and the goal of mediation is to facilitate an amicable resolution that will help restore a friendly working relationship.

Informal Process: The manager and employee come together to talk through their differences (with the guidance of a skilled mediator). Unlike a court proceeding, there is no discovery, calling witnesses, presenting evidence, etc.

The Process is Confidential: Everything that is discussed during mediation stays between the participants and does not become part of any official records. This can be especially reassuring for employees, allowing them to speak more openly about the issues they are having.

Participants Control the Outcome: Mediation is voluntary, and no resolution can be imposed without the agreement of all parties involved. This distinguishes the process from binding arbitration, where an arbitrator makes the final decision. Though the process is facilitated by the mediator, with mediation, the participants ultimately decide how they will resolve their differences.

Using Mediation to Come to Terms on a Direction for Your Business

Using Mediation to Come to Terms on a Direction for Your Business

As business partners come together, there can be mixed opinions about the direction of the partnership they have formed. Partners stand on equal ground in a partnership and sifting through the important decisions can be a strain on that relationship. Disputes often arise, many of which can be resolved on their own. There are times, however, when the intervention of a third party may be necessary to mitigate the issues around the dispute and keep these issues from jeopardizing the stability of the business.

Mediation for New Partnerships

The agreements made in a new partnership are important factors in determining how the business will function. As partners are just beginning to work together, it is very crucial that everyone be on the same page. Mediators have the professional training and experience to navigate discussions between new business partners. They can help to guide and advise the partnership based on the strengths each partner brings to the table. They can also help draft a business partnership agreement, which helps the business start off on the right foot.

Mediation for Partnerships Experiencing Disputes

In situations in which partners have a dispute, bringing in a third-party mediator can often be the most effective solution. Having a neutral party that can take an outsider’s view can help guide the partners toward a more amicable solution in which all parties can be satisfied. To work out these disputes, professional mediators can meet with each business partner individually, listening to them present their views on the situation.

The mediation process is confidential, practical, and cost-efficient. Once the mediators have analyzed the issues, they work to come up with a solution everyone can agree on. Each partner brings different strengths to the table, and professional mediators can see and understand these strengths and communicate them to the other partners. This can often help partners see things they may have previously been missing, allowing them to gain a whole new perspective on the issue. This type of approach can allow the partners to develop more creative solutions that highlight their strengths.

Another advantage of the mediation process is that it helps participants decide whether or not a dispute is able to be resolved, or if the differences are irreconcilable. If they can come to an agreement, then the partnership will most likely emerge much stronger. If they find that the major issues between them cannot be resolved, then they may have to have a discussion about dissolving the partnership. Either way, business partnership mediation participants are able to gain immediate clarity about what needs to happen next.

Addressing business partnership issues and coming to terms on the direction for their business can be a major challenge. Mediators have the experience, training, and expertise to work successfully with all types of disputes and partnership agreements. Mediation allows for a neutral space for all parties to speak openly about their thoughts regarding which direction the company should go. And after taking in the whole story from all partners, mediators can help the partnership develop a winning solution for their business.

Why Do Business Partnerships Fail?

Why Do Business Partnerships Fail?

Business partnerships are not unlike romantic relationships. In the beginning, there is nothing but excitement and optimism as they start their new venture together. Faults are overlooked, explained away, or otherwise ignored in an effort to focus on the larger goal of building something great together. When the partners move past the planning stage and decide to jump in with both feet and “tie the knot”, it often happens without a lot of thought given to how they will deal with conflicts that may arise along the way.

Some disputes between partners are small and fairly easy to deal with, while others can blow up into a major rift that threatens the future of the business. Here are five types of disputes that commonly cause business partnerships to fail:

1.  Disputes over Finances

During the first 18 months to two years a partnership is in business, there is a good chance that there will be some tough times. Sales may be slow in the beginning, startup capital may start to dwindle, and the time comes when you have to make difficult financial choices. When there is plenty of cash lying around, there is usually not much worry about where you are investing your capital. But when funds start to dry up, money can become a major source of conflict.

2.  Vaguely Defined Roles

When partnerships begin, the roles of the owners tend to overlap. This may be okay at the very start while you are getting the business off the ground and everyone is putting in 18-hour days. But if the partners do not clearly define their roles soon after, there may be confusion about who is in charge of what.

3.  Personality Conflicts

Some partners have a hard time getting along due to personality clashes. For example, one partner may be domineering and controlling, while another is more passive. This might be okay for a while, but when things start to get tough, the passive partner may start to resent the one who wants to control everything. This is not to say that partners need to have identical personalities; that might actually be worse. However, if the personality differences become too much to bear, it may be best to consider parting ways.

4.  Style Conflicts

What if one partner is a Type A personality who is focused intently on achieving goals and progressing step by step toward building the company, while the other goes from one big idea to another? The problem with the second partner is they are always coming up with these “amazing” ideas, but they never stay focused on one long enough to make it a reality. You can see how partners with these two styles can have some serious disputes.

5.  Values Conflicts

Your business should have a vision, mission statements, and a set of values that you operate by. But what if, in the midst of all the excitement starting your business, you later realize that you and your partner do not share the same values? You should be clear from the get-go about what principles you will operate by, how you will approach business development, how employees and customers should be treated, and how you will deliver your products or services. Make sure you are on the same page on this one.

Is there a Solution for Major Disputes Among Business Partners? 

Like marriages, there are some business partnerships that are simply doomed to fail. That may sound harsh, but it’s reality. There are others that can be saved if the partners take the right steps. In either case, one of the best ways to get a handle on conflicts between partners is through mediation.

Mediation is a form of dispute resolution that allows business partners to work out their differences in a cooperative setting. The process is facilitated by a neutral, third-party mediator whose job is to guide the discussion toward a workable and peaceful settlement. Through mediation, partners can identify and address the underlying issues that are causing the dispute.

At the end of the mediation process, partners typically have a much better idea where they stand. They either learn that the business can be saved and the steps they need to take to save it, or they learn that they are better off cutting their losses and dissolving the partnership. Either way, mediation helps partners move forward toward resolving the conflicts they are dealing with.