Wednesday, March 5, 2014

Mistakes entrepreneurs make Part II

As we discussed last week, there are several common mistakes entrepreneurs make with their businesses.  Not having a solid business plan is one.  If the business is owned by partners, not having a detailed operating agreement is another.

Beth and I have a very detailed operating agreement.  We were friends before we became business partners and we wanted to remain friends no matter what happened with E & S Entrepreneur Advisors LLC.  We worked on this for over a week and it is in writing.

It is amazing how often you can think you are in agreement when you are talking about a subject, and then when you see it in writing, you do have differences to work through.  We recommend having each member of the business answer a series of questions designed to create the operating agreement and then compare answers.  There will always be areas of disagreement and then there must be compromise if the partnership is to work.  If the members can't come to a compromise, they should not open a business together.

This is true with family members as well.  Spouses, parents, siblings and other family relationships can be strained when running a business together.  Setting up a formal operating agreement can help.  We recommend designating an arbitrator at the outset to help resolve disagreements.  This should be someone everyone agrees on and is someone everyone feels is unbiased and will have the best interested of the business in mind.  This is only one facet of the operating agreement but it is a key one to getting decisions made while maintaining harmony.

Other things to agree upon are the duties of each member, compensation of each member, financial responsibilities of each member and how the business will be dissolved should the need arise.

We have seen several instances where a business didn't have a detailed operating agreement and in every case, the business failed or the relationship failed.

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