Thursday, September 6, 2012

Top Ten Ways to Stop Disputes Within a Business Before They Arise

All may be well in the early days, when your business partnership doesn't amount to much more than a somewhat dated cell phone, a rack of really outdated CDs, and a happy computer face coffee mug.  But later, when things really get going ...              Photo credit: Ian Britton, Creative Commons License. 

Media attention often focuses on business struggles between competitors, like the apocalyptic patent litigation between Apple and Samsung. I suppose the popular allure of such disputes at least in part is the same as the allure of athletic contests: conducted in public, among relative equals, with the perception that winner takes all.

Less talked about are disputes within businesses and among their members, be they childhood friends who have tossed in some money to open a small restaurant, professional partners, or larger corporations undertaking some kind of resource exploration joint venture. These internal business disputes are likely more preventable than the external ones, with a bit of early planning, and perhaps a little legal advice. While the type of dispute prevention will vary according to the type of business, and the parties involved in the business, there are a few fundamental principles that can help everyone prevent internal disputes from ruining externally successful business endeavours.

1. Plan for some business dispute DIY prevention at the same time as you plan out how you are going to dominate your market segment with your new business. Dispute prevention works best in reverse. Meaning, figure out in advance the most likely areas of dispute a month, year or decade down the road among the members of your business, and then work backwards to establish contingency mechanisms to resolve at least some of those disputes. Like, what happens if a co-owner wants out before the business if profitable? 

2. Put you business agreement in writing. It doesn't have to be a lengthy document. One hundred pages won't necessarily give you any more certainty than two pages. Seriously. A complex and prolix document may only give partners more language to fight over in the future, and likely won't be well understood at the time it is signed. But the writing is key, otherwise even two people who trust each other implicitly will tend to develop differing recollections of exactly what was agreed upon as time passes after the establishment of the business relationship. I'm not saying every single action needs to be fully documented, but at least be clear on the basics. I see a lot of disputes where very reasonable people who completely trust each other go into business with very different understandings of what has been agreed upon.

3. Be clear on the businesses legal structure. This isn't something you necessarily need a lawyer for. You can probably figure it out from Internet information. But a lot of people don't know how their business is legally established, which can have lots of consequences when it comes to ownership, debt liability, taxes and sharing of business control. Your main options are as a sole proprietor, as a partnership, or as a corporation. But things can get tricky when these three basic forms get combined. Like two people who believe they are each sole proprietors, when in fact the law deems them to be a partnership. Not only small businesses can run into trouble in this area, sometimes large multinational corporations get together to jointly pursue some kind of business opportunity, and wind up in an accidental partnership which they hadn't intended.

4. Be clear on who owns what. Putting everything in one party's name, with a verbal understanding that the other parties actually have ownership rights because they are contributing capital to purchase assets, is one of the best ways I can think of to later wind up in court.

5. Be clear on who is contributing to or paying for what. When people get together in informal ways, and start contributing money to get a business going, and later continue contributing money to keep the business going, they often don't divvy up expenses by percentage. One pays the rent. Another pays the electricity. A third pay for the inventory. Although perhaps initially convenient, this way of financing a business becomes difficult to track, and can lead to later disputes over who contributed more or less to the business.

6. Be clear on how the profits will be utilized or divided. Whether there are any profits, and whether they will be reinvested into the business or taken out to pay the personal expenses of the owners, may quickly become an issue if business parties don't agree on a strategy in advance.

7. Be clear on who is responsible for the debts. Just because you didn't sign a loan guarantee, doesn't mean that you aren't on the hook for any debts of the business.

8. Be clear on the overall purpose of the business. A successful business that starts out manufacturing and wholesaling shoes may not make an easy transition into the electric car design field. Possible, yes. Easy, definitely not. If more than one person controls the business, they will need a common vision. Sometimes putting that vision in writing up front will help remind everyone of business' purpose if vision drift starts to affect performance later on.

9. Be clear on how disputes will be resolved. It is not possible to foresee and address all manner of future business disputes, even in the most complex of written agreements. However, the parties might be able to agree on a few basic points. Like that majority vote of the partners will be decisive on certain issues. That binding arbitration will be used for other issues. Or at least that a courts of a particular jurisdiction will be the place to settle disputes through litigation.

10. Be clear on how the business will be wound up or sold if one of the owners doesn't want to continue with it. People get tired. So do businesses. Sometimes it's better just to call it a day, and start one or more new businesses, rather than continue to fight to save or control an existing business. But every business needs an escape hatch, to avoid the captain(s) and crew becoming trapped in a sinking or fighting ship.

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