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Be safe put your business agreements in writing

by Forrest Peck

When you’re in business, you need every break you can get. Some problems are avoidable, and others aren’t. One common mistake that’s easy to avoid is getting into business agreements and partnerships with people and not putting the details into writing. Written agreements are essential for many purposes; for instance creating general partnerships or limited liability companies. They are also crucial for identifying financial terms, for instance when a friend or family member invests in your business. The lack of clearly written agreements can eventually lead to problems, and possibly early business closure. When the result is fighting partners or unhappy relatives you have a disaster.

Nevertheless, people often ignore this simple step and continue to ‘tie the knot’ with business partners without written agreements. Why?

One reason is that business partners are frequently close friends or family members. Owners enter into handshake agreements and think everyone has the same understanding about what was agreed upon. Often these perceptions differ, and the realization of this only comes after problems arise. The belief that because we know each other written agreements aren’t needed is frequently wrong.

Another reason is fear that suggesting written agreements might be embarrassing or could be taken as a betrayal of trust. Good relationships stand the test of exploring agreements and disagreements, and putting them on paper. If it strains the relationship, you probably shouldn’t be in business together; after all, the relationship is more important than the business.

How do you get started creating a good business agreement? The process starts by talking with each other. This helps identify how to do business together and what should be in the agreement. It helps identify areas of potential disagreement and avoids the need to solve these things later.

Some things to discuss and include in a written agreement are:

  1. How decisions are made. While this might seem obvious before you’re in business, it isn’t so clear afterwards. The daily operation of the business sometimes requires prompt decisive action.
  2. How work is divided. When one partner thinks they are working harder than the other there will be conflict. Clear descriptions of the work each partner will be responsible for is needed.
  3. How long the agreement lasts. Even if business owners remain on good terms, death, disability, divorce or other life changes are common. If there is no written agreement in place to protect the other owner, disasters can occur. Unintended consequences like children, heirs or former spouses having an involvement in the business can result.
  4. How the finances are handled. Identify each partner’s investment, percentage of ownership and compensation. Also identify how banking and recordkeeping will be handled. Keep in mind that profits as well as losses will be shared.
  5. How disagreements are resolved. It will be beneficial for your business agreement to identify a dispute resolution process. This might include mediation or arbitration.

When problems arise the best thing is to do is keep talking. Most people are initially willing to extend some measure of good will or grace, but that grace quickly ends when communication stops. Talk to your accountant and your attorney to get help on creating a written agreement. It’s a whole lot cheaper to avoid a problem then solve one.

About The Author: Forrest Peck

Forrest Peck is the Executive Director or Microenterprise Resources, Initiatives & Training (MERIT) in Salem. MERIT is a microbusiness development organization that helps people explore, launch and grow successful small businesses through education and support. More information about MERIT can be found on their website: www.merit-microenterprise.org.