Have you ever seen a movie where eight people are standing in a muddled mess pointing guns at each other? Everyone is waiting for the others to pull a trigger or put the guns down. The tension is high, and the slightest wrong move could lead to utter disaster. Sometimes, building a business can work its way into a standoff, where no one has a clear head and one wrong move can tumble the house of cards.
Good Intentions in Partnerships
At least once per week I get a call from someone in a partnership that is turning, downhill quickly. Two or more people started out as good friends with a vision and a lot of ambition. They understood what they wanted to accomplish and each was willing to do the work necessary to get there. For various reasons things begin to fall apart:
- One partner wanted to change the direction of the company.
- One partner ended up setting the direction of the company, and if positions were never clearly defined, it has caused tension.
- Life circumstance takes one partner away from the business, leaving one that perceives they are carrying the unfair share of the load.
Regardless of how partners end up with juxtaposed ambitions, they are avoidable 100% of the time.
Every organized ambition, regardless if it is for-profit or not-for-profit, needs a partnership agreement. Partnership agreements should be one of the first things any group of people constructs when they begin their effort together. Do not wait. Once the ball is rolling down the hill, it will only get more complicated.
In fact, I just assisted the sale of a company with owners who found themselves in this exact place. Two years ago, the company had revenue near $1 million. Today, it is under $400,000. Why? The partners could not agree on where the company should go. So, instead of having a company they could potentially sell for several million dollars, they found themselves lucky to sell it at all.
Operating agreements are a must-have at the formation of any new entity. The primary purpose of an operating agreement is to define the rules of engagement while everyone is getting along and is equally excited about where the project is headed.
Don’t Be the Fool I’ve Been
Generally, as an entrepreneur, I have avoided implementing operating agreements for three reasons:
- Early on, I had no idea that operating agreements existed.
- I foolishly believed everything was going to work out perfectly because we were “all in this together.”
- I have been so desperate to have people working with me that I simply ignore the need.
Don’t fall into those traps!
Top 5 Reasons to Have an Operating Agreement from the Start
1. They Set Expectations
Contracts are a “meeting of the minds.” It is nearly impossible to find a happy meeting of the minds in the midst of controversy. When we wait to resolve issues in the midst of controversy, sacrifices being made generally result in resentment. Conversely, when we come to agreement through mutual sacrifice when there is no controversy, the result is team building.
2. They Create Accountability
Partners, particularly visionaries, tend to start off with great ideas. Where they typically struggle is when the work becomes boring. Operating agreements create accountability to meeting the expectations. Effectively, they are the third party standing nearby with a consequence if either partner fails to deliver.
3. They Are Guidance on a Cloudy Day
Invariably, no business goes “as usual” for ever. A day will come when problems will arise. Those problems can come in the shape of cash flow, vision disagreement, staff management, whether or not to pursue a new business opportunity or a plethora of other things. The operating agreement will create methods when everyone is levelheaded for resolving these and other conflicts. The biggest advantage of this is that everyone starts from a point they already agree on, the method for solving the problem. The most difficult part of any conflict is finding the starting point of resolution.
4. Keep the Government Out of Your Business
Most people are familiar with the fact that if you die without a will, your possessions, including your kids, must be put in the trust of the state while the courts determine what to do. Similarly, states have rules for resolving business decisions on behalf of owners when there is no operating agreement. Do you really want the G-Man making these kinds of decisions for you?
5. They Settle the Vote
Splitting the ownership of a company 50/50 is fine; but, how will you make decisions when you do not agree? When you rely on consensus for every decision the organization makes, you are limiting your business to the lowest common denominator. Creating a structure for allowing clear leadership will allow your company to be much more flexible and responsive to market needs.
Here are some great resources for getting your operating agreement started:
https://www.rocketlawyer.com/form/llc-operating-agreement.rl
https://www.lawdepot.com/contracts/llc-operating-agreement/#.V1ezoJMrLow
http://www.joebarich.com/Documents/LIEE%20Sample-LLC-OperatingAgreement.doc
