Optimism abounds in the early stages of a business partnership as the new company’s key players dream about success and all that comes with it, says Mark E. Krohn, Partner at Brouse McDowell. It’s during this time of great expectation and excitement that business partners should pause and talk about important issues such as capital needs, founder roles, other outside business interests and how disputes and stalemates will be handled.
“One of the things I see that early-stage partnerships don’t do very well is thoughtfully discuss expectations, define roles and responsibilities and have a clearly stated path to follow when the company hits a speed bump, needs cash or is faced with a key decision upon which the main decision- makers disagree,” Krohn says. “The worst time to discuss important or sensitive issues is when an event like that happens and battle lines are already drawn.”
Taking the time to create a detailed and understandable business plan and well thought out operating agreement can avoid a lot of these costly challenges and disputes between partners.
Smart Business spoke with Krohn about the steps business partners can take to be better prepared to operate their company and deal with conflict.
What are some important points that business partners need to address?
Business partners are often focused on the many opportunities that are out there for the new venture to go after. This is important, but it can distract them from the less exciting but no less important step of discussing the essential elements of the business. You need a detailed discussion of how things will work, the time and commitment that will be required to operate the business and what each partner will do and/or not do. It’s critical for each partner to talk about their role in the business so that everyone knows what is expected. More than a job description, it’s an opportunity to get clarity on which aspects of the business operation each partner will oversee, drive and forge to completion.
Another thing that companies tend to gloss over is the type of roles, amount of time and deliverables each of the key partners will be called upon to execute. I’m talking about what does success look like and over what period of time? Three months, six months, nine months, a year, two years, etc. Companies rarely sit down and say, ‘This is what the company is going to achieve, this is who is going to be in charge of leading it and these are the objective indicators we’re going to use to measure it at various intervals.’
You also want to have a good dispute resolution mechanism in place and have an independent third party who can quickly build consensus or make decisions when partners disagree. One option is to draft into your operating agreement a third-party neutral that all the partners like, know and trust in a personal, professional and business sense. When a dispute arises, I typically mandate that it be discussed with the third party in five to seven days. This person will act as a mediator and try to bring the partners to consensus. If consensus cannot be achieved, that person can make binding decisions after hearing all of the facts. This process avoids costly litigation, incredible delay and the other ancillary damage that a long, protracted partner battle can cause to the relationship of the partners, company morale and the business.
What’s the key to managing conflicts over money?
One of the most common things people fight about is money. Whether it’s distribution of profits, who is making what salary for what tasks or simply needing money to pay bills and determining where that money will come from, it’s a good idea to have provisions that specifically detail all of these things. If the company needs money, it has to come from somewhere. Whether that’s a bank, or if the company is not able to be financed, a partner, there needs to be a thorough agreement of what will happen in each instance, especially when one partner can contribute financially, but the other partner cannot. That way, no one feels as if they are being taken advantage of in a critical, time-sensitive decision, while still allowing the company to move on without an interruption of its business. This is probably the partner dispute I see the most and people often only think about it after the situation arises, which rarely leads to good decision-making.
Insights Legal Affairs is brought to you by Brouse McDowell