Recently, I read an article at Entrepreneur.com called, “3 Agreement Types Every Entrepreneur Needs.” The article was written by an attorney now working for LegalZoom. As we might expect, it focused on the form agreements one would need when starting a business with the author stating entrepreneurs require three basic forms: owner agreements, worker agreements, and finally, customer and vendor/supplier agreements.
While that’s really good advice, what we put down in writing is actually of secondary importance to five even more important agreements all business collaborators must come to before putting anything in writing. Although the stuff we put in writing will certainly help clarify later positions and, hopefully, shorten or simplify litigated issues, the following five, preliminary agreements can help avoid such disputes altogether.
So, what do business people need to agree about before they even decide whether to do business together at all? These points:
1. Shared Values
Do we have many shared or at least complementary values? It is well-known that we prefer people who are like us, but in business, that you and the other party really care about the same things and that you have similar character standards is critical.
If one person thinks nothing of shoddy bookkeeping or doesn’t have a problem with “little white lies” but the other party is a stickler about such details, this deal should be recognized by both as a non-flier. It’s all these little differences that add up to big (read: expensive) fights later on.
The challenge with values is you may naively assume everyone shares your views about basic concepts like honesty, integrity, loyalty, reputation, respect, and morale. And maybe when times are good, it may appear that you and your colleague do share your values.
In many instances, however, the differences don’t show up until hard times are upon you. Or perhaps the differences won’t actually “show up” so much as they “turn up” when poor or dishonest business practices are inadvertently discovered or revealed by things like audits or cleaned-out bank accounts.
Therefore, a close examination of the character and values your perspective business partner, worker, or vendor is in order before you ink the deal. That examination should involve not only careful discussion between the two (or more) of you, but also investigation of how that person has handled other deals with people who know them well and will disclose their impressions without hesitation.
2. Complementary Behavior
Complementary behavior is another way of saying, what are your business colleague’s motivators? Are they a planner or do they fly by the seat of their pants? Do they prefer the safe road or will they risk all to get a result, etc.?
When evaluating the suitability of parties to a deal, you should be asking yourself not only whether that person’s “style” is complementary to your own, but whether that person is a really great fit for the role in which they will be working. In other words, you don’t want an “entrepreneurial type” as CFO any more than you would want someone fearing risks in a sales role.
Placing someone in a role or a deal for which they are unsuited by temperament is a receipe for disaster. Not only are you setting them up to fail, personally, but if their role is key, their failure could jeopardize the entire deal as well.
3. Work Styles
This may seem obvious, but I can’t tell you how many clients in partner disputes complain that their partner was “too laid back.” By that, they might mean that the partner didn’t come to the office as much as they did, so my client concludes the partner wasn’t “working as hard on the business.”
While I may be sympathetic to the client’s wish to be rid of such a person, I can’t rush to judgment about the other party’s commitment to the business from this information alone. What if the partner is in a sales role and spent all day driving around connecting with potential leads? What if the partner is an IT guy and does most of the heavy lifting in the middle of the night?
Perhaps my client is a control-freak or maybe has a presumption that face-time=working. Either way, everyone should know and be prepared to accept the work-style of their colleague once the deal is done. Ask the questions now. If there is a conflict in style, take a pass on the partnership and save yourself the inevitable heartache and bank account bruise.
4. Basic Business Education
Another shockingly obvious-sounding agreement should be that everyone on the core team have or be willing to attain a certain level of basic business education. This does not mean more school, necessarily, but the center of many small business break-ups I’ve seen is fundamental misunderstanding of common business practices.
Many times, these misunderstandings lead to distrust, dispute, and ultimately, failure of the entire deal. Sometimes, the lack of basic business information can even involve a side-trip through business tort land.
For example, an owner may believe himself entitled to raid the business accounts to pay personal bills or otherwise circumvent standard bookkeeping requirements. Maybe, an employee starts a competing business on the side or a trusted vendor discloses your trade secrets to your competitors through shoddy privacy procedures.
Be sure that everyone knows at least a little about bookkeeping, business law, business ethics, and taxes before doing the deal. Oh, and don’t try to be the “teacher” after the school of hard knocks lesson is already underway! (Trust me on that one.)
5. Pre-approved Advisors
Indeed, the best advice when business issues arise should be delivered from competent, unrelated, objective, and pre-selected professionals. That’s because when little, controversial questions come up (and they will), having a person in place both parties trust is worth gold.
Especially among parties starting a business as partners, everyone should agree in advance on a team of business advisors–none of whom is anyone’s personal relative or friend or doing the work “as a favor” to anyone. And after selecting an advisor, none of your team should do any potentially-conflicting side deals with them either. In other words, everyone should always agree that the advisors represent the business and no one individually.
Having that team in place from the beginning will establish trust between each party and each advisor before trouble arises. After a conflict, everyone will want their own counsel and their own experts to support their “side” of the dispute, and counsel will not be able to represent more than one party anyway. But, hey, once everyone is financially-committed to “their side,” it’s pretty much game over already. Isn’t it?
In conclusion, before spending the time and money preparing pretty forms in the event of a dispute, attention to these five areas will help you head-off such a dispute before it even begins. Do yourself a favor and do this stuff first.