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.