When I first meet with a group of entrepreneurs who have an idea and want to create a business, one of the questions I ask that often receives the most unique reaction is “what would you like to have in place if this plan does not work out.” Often, these individuals who are still in the afterglow of their new idea and the thought of a business venture, don’t want to discuss if it is unsuccessful for whatever reason. They also do not want to discuss what to do if a personality issue or other conflict impacts the business and their chance to be successful. However, in reality, it is essential that this discussion occur, and key decisions are made before the business is created.
Why is Preparing for Future Problems Important?
During this initial discussion, I tell these prospective partners that there are three general categories of circumstance that will often cause stress and conflict within a business. These are:
· Failure of the business
This is probably the most apparent scenario. When the business lags, the idea is not working, or begins to fail, individuals start to look to each other to place the blame. Rarely does one business partner state “this is all my fault.” Finger pointing and recriminations begin in earnest between the individuals.
· Success of the business
Typically, individuals believe that, if they are successful in their venture, everyone will be content and the business will continue to grow. However, this is rarely what occurs. Money and success often bring out the extremes in people’s personalities. Conflicts escalate when the dollar amount is higher. Rarely does a business partner state “I give all the credit to my other partner.” Pride begins to negatively impact the business.
· The business remains stagnant
Business, like nature in general, abhors the status quo. Stagnancy is the precursor to problems with the business. If you are not moving forward, you are actually moving backward. I often observe this scenario when a business initially finds success and growth but reaches a plateau that it finds difficult to rise above. Similar to above, often businesses find someone to blame and it is often one of the partners.
After I discuss these three scenarios, which can impact any business, they realize that it does not matter the circumstances or good feelings of the moment, it is best to address the question now and have the proper preparations in place.
A Strong Legal Framework is Essential
One of the keys to avoiding partnership issues and future disputes is to both define the business relationship between the prospective partners, and the procedure that is in place when an issue occurs. This is accomplished by the operating documents created at the initial corporate organization of the business. These documents may include, a partnership agreement, an operating agreement, corporate bylaws or other policies enacted during the first corporate meetings.
These operating documents provide the proper framework for the business, outlining authority and who is responsible for certain items. They also will provide the framework to address issues that arise for the business and how disputes will be addressed. When a business partnership has defined their expectations and individual responsibilities early, the odds of misunderstandings decrease because everyone knows their responsibility, everyone knows the procedure if there is a question, and everyone knows what they are entitled to as the company succeeds or possibly fails.
Even if there are no issues or disputes between the business partners, a strong corporate and legal framework will assist when unexpected contingencies occur. For example, these documents will address what procedures are to be taken when there is a medical situation, disability, or death of a partner. It also can address if a divorce occurs. The corporate organization documents can also provide the framework when an unexpected economic, natural disaster or other development occurs, which often requires decisive action in order for a business to survive.
Although it may seem counterintuitive to prepare for a dispute before a business has begun, it is actually essential that this type of preparation occurs. If fact, completing strong corporate documents and a legal framework to address these contingencies, increases the likelihood that these negative effects can be reduced or eliminated altogether.