22 Aug Putting Everything in Writing Now
Starting a business is complicated enough. But, when you add in business partners to the mix, it can be a disaster if you do not get organized on day one.
To build your business’ foundation, you must create an operating agreement. This is not optional. Even if you are working with family members or friends, an operating agreement is your playbook of “rules” and procedures as to how you will handle your business.
Here are the top 3 reasons why you should never start a business without an operating agreement.
1) Roles & Responsibilities. Knowing what role each person in the partnership will play is essential to running a smooth operation. For example, will you alternate day-to-day responsibilities? How will you track this? How are decisions made? What should happen if either of you is not performing? These are all important questions to consider now before committing to starting a business. You do not want to jump in headfirst, only to realize later that your business partner’s work ethic does not mirror your own.
2) Money Management. This is often the biggest area of contention and for good reason. Whoever has access to the money, often holds the control. Will you both manage the bank accounts? How much should each partner contribute for start-up capital? How are paybacks handled and when? Will you take a salary, if so, how much? How do you determine salaries? What partners have to sign off on getting business loans? The money questions can go on and on. That is why it is always best to iron out all money-related expectations before you start making money. Once large amounts of money are coming into your business, having to step back and negotiate salaries, investments, paybacks, etc can quickly lead to irreconcilable differences.
3) Exit Strategies & Options. It may seem futile to think about the exit before you even start your business, but it is crucial that you and your business partner are on the same page now and have similar future outcomes. For example, if you want to sell the business, but your partner does not, how will you navigate this? How will you determine when the business should be sold? How will profits from a sale be divided up? Even if you and your business partner are in agreement now, document everything, should you need to refer to it later.
These are just a small sample of why you need an operating agreement as soon as possible. Simply put, your operating agreement is your business playbook for everything!
In your current business, do you have an operating agreement?
If you answered “no”, then you must stop right now and focus on getting one done immediately. Trust me, you do not want to wait!