The days of handshake deals and keeping true to your “word” no longer exist in the business world. In the modern business environment, it is important that you see a promise or a contract in writing. Whether it is in a text, email or a drafted agreement, any written format can help to support your position, if and when someone goes against their word. This can be particularly true when two business partners have different ideas on how to manage their business.
This article will discuss a few reasons why two or more partners should place their relationship into a written agreement to clarify their business arrangement.
Who does what?
Have you assumed that your partner is going to take care of the tax matters of the company? Or that they will be the one to pay the bills or collect payments from customers? What if your partner assumed you were going to take care of these issues? Understanding the role that each partner plays in a company is key. Failure for partners to play into their roles can hold your business back, cost the business money, and put you at a competitive disadvantage. Instead, define your role early, even before the business is created. Partner’s roles should play to their strengths to create a cohesive, well-oiled business.
Be on the same page – know where you want to take your business.
Have you and your business partner discussed where you expect the company to be in 1, 5, or 10 years? Is your partner close to retirement and you believe (but are not sure) that the business will be handed off or sold to you? The best way to avoid surprise is to prepare for the unexpected. In a limited liability company or a corporation, a buy-sell agreement will force all the partners of a business to discuss where to take the business in the future, how to deal with a partner’s death, divorce or other surprising life event, and what to do in the event of a partner quitting.
Prevent disagreement during tough times.
The most difficult time to stick to your business plan is when the economy is poor, or your business slows down. Either scenario can cause tensions to rise. This is the point in time where a successful business will swim, and an unsuccessful business will sink. Furthermore, this may be the point in your business where one partner wants to double down, and the other wants to cash out. So which option do you choose if the partners cannot agree how to move forward?
This is a potential problem that can be wholly avoided by discussing these issues prior to the start of the business or early in the business’s life. A knowledgeable business attorney can give partners options regarding the exit of a business such as a right of first refusal or a buy-sell agreement which will establish a fair amount at which a partner can sell his shares.
So, what are some of the measures that can be done to avoid problems that may arise in your business?
First, over-communicate. Make sure you and your business partner are always in sync. Over time you will start to gravitate towards similar decisions or at least identify where your partner stands. Second, write out your business plan and your partnership agreement. Identify some areas of concern and address them early. Oftentimes it is difficult to make an informed decision when you are caught up in the heat of the moment. Last, set up exit options early. There is an infinite number of unexpected events that may change the course of your business overnight; be prepared.
The information in this article is provided for educational purposes and to give you an idea and general understanding of the law, this information is not to be construed as legal advice. Please consult with an attorney before making a decision about how to form a legal entity or set up a new business. Many ideas and situations are unique so an attorney should look into your specific circumstances to see what options are best suited for you.