The 2% Solution for Disputes among Business Partners and Partnerships

The 2% Solution for Disputes among Business Partners and Partnerships

Preparation Avoids Business Partnership Problems that could Kill a Business     

Many people start a business with friends, neighbors, relatives or spouses and it’s often a partnership 50/50 arrangement. Rarely is there a written business partnership agreement and this can be a big mistake. These arrangements often work well until there is a problem but then…the problem could be a big problem and the dispute can spin out of control quickly. It is not uncommon that these problems wreck a business and do significant, sometimes fatal, damage.

Small business partnerships should come with a warning label “Caution: Partnerships work best when the partners document the problem resolution methods before entering the partnership.”

There are many advantages of a partnership which can lead to business success far beyond what an individual might have accomplished on there own. However, the success of a partnership 50/50 agreement is often determined by the care taken when the partnership agreement is put in place. A good and well defined partnership in business agreement can serve as a tool to help you run your business professionally and increase your chances of getting outside investors.
I’ve seen what appear to be small issues to outsiders become big issues to business partners. A simple and very effective solution is available to business partners who have the foresight to set up a system to break impasses should they arise. A business partnership dissolution doesn’t have to be a financial catastrophe for the business or it’s owners if there is a well documented and thought out business partnership agreement.

I have seen businesses fail because the owners were stuck on issues that most of you would say “oh, that would never happen to us” but you are rolling the dice. What happens if your business partner is involved in a divorce and suddenly there is a new spouse in the picture who thinks 50/50 means opportunity?

I saw a situation a few years back (I know you’re thinking I’m making this up but I’m not) where one partner put out a contract on the other. The partner got out on bail and showed back up at the business! He was a 50/50 owner and the other partner couldn’t do a thing about it without resulting in a lawsuit and a request for an injunction and restraining order through the court system.
Another benefit of going through these “what if” scenarios with your soon to be business partner is it will help you understand how they think and how they might react in a business crisis which will surely present itself in one form or another.
The 2% Solution
This is elegant, simple and highly practical. In your LLC partnership or operating agreement put in a provision that grants a third party, agreed to by the partners, a 2% voting interest. Each partner would have 49% voting rights each. That way if the partners agree they have 98% vote and they can do what they want. But if the partners disagree, they take their problem to their 2% voting partner and whichever position the 2% takes means there is 51% of the votes and that’s the decision.
Some attorneys may prefer to have a separate business partnership document or member agreement to govern this issue, certainly get legal advice from a business attorney.
Remember, the only time the 2% vote is required is if the partners can’t agree on an issue. As long as the partners agree then the 2% vote doesn’t effect anything. And that’s exactly the purpose of this partnership agreement, to have a mechanism to resolve issues when the partners can’t agree.
The important part of this strategy is to do it long before there are any disputes. It will be much easier to select who the 2% voter is if there aren’t any pressing disputes at hand.
Here’s an excellent guide to forming a good partnership. Setting up your business partnership correctly at the beginning is the key to resolving inevitable problems in a manner that doesn’t destroy the partnership or the business.

If you ever thought you can turn your hobby into a business…….

Many people we encounter think that starting a business based on a hobby is a good idea…it rarely is.

Maybe they’ve read too many “Do what you love” seminar headlines. The reality is, it’s either a business or a hobby and never both.

This recent article in the Wall Street Journal gives you a look into one persons attempt to turn their hobby into a business.

Point. Set. Match. I Lose!

This article published in The Wall Street Journal Small Business Management Section.

Uncertain Times, Reason to Act or Reason to Wait?

I am often asked “when is the best time for someone start a business?”. As you might imagine, the answer is different for everyone and even then, the answer is never 100% evident.

If you wait until the risks are minimal the time might may never come, if you leap when the risks are huge your chances of success are reduced. So what to do…………………..

My advice is to make sure you have thought about the opportunity and the risks. Knowing that you can never really quantify the risk. Here are a few questions:

  • If the business takes a year to get going what happens?
  • How much of my own money am I willing to risk?
  • How much of others people money am I willing to risk?
  • Am I as smart as I think I am?
  • Do I have a bullet-proof plan for the first 6 months? If not, why not?
The last item is critical, if you have a bullet-proof, well thought out plan for 6 months…and you can execute that plan, your chances of success go up dramatically. The reason is simple. A great and accurate 6 month plan means you know enough about your market and your customers to give you time to adjust to changes. The ability to adjust is an essential survival skill in business.
If you really want to start a business, focus on a well thought out 6 month plan. Review it with people who are in business, be honest and do your homework. If you’ve done all that and the opportunity still looks good…jump in..and welcome to the world of the entrepreneur.

The hard work of un-fooling yourself………..

As I’ve written before, during the 1st quarter of the new year I find myself trying to take extra time to plan and evaluate. Some of this is an natural reaction to reviewing the financials in preparation for filling taxes. Some of it is just my reaction to something I’ve heard or read somewhere.

During a recent walk I was thinking about something I read in a blog article by Michael Hyatt, by the way, if you are unfamiliar with him I recommend his blog. He writes a lot of good stuff about business and some interesting stuff about managing life. In one of his articles he hinted at something that I reformulated for my own use. What I’m talking about is trying to identify the business and personal habits, processes or practices that I automatically assume make sense but on closer investigation I’ll find out the idea either was never a good idea or it’s an idea who’s time has passed.

Once I decided to take a look I couldn’t believe how difficult it is to then decide which things to look at! I decided I’d look back at the prior week for some clues or direction. I had thought that the prior week was really pretty uneventful and not very interesting nor complex. But then I started breaking down the events and connecting the dots it got messy. I’m now convinced that many things are simple but few things are uncomplicated.

I then made the leap of logic that goes like this, “If I’m trying to figure out what I’m fooling myself about, then obviously I’ve already fooled myself and how will I recognize it?” Now what do I do?

It wasn’t nearly as difficult as I thought. Here’s what I did. I went to someone in our office and asked the brilliantly insightful question, “What do we do that’s dumb?” Much to my surprise (and a bit of disappointment) they didn’t need to think about it at all, nearly before the words came out of my mouth the person had listed 3 things…. bang..bang..bang!

To shorten this post I won’t bore you with the details but here are the results of looking into the 3 things identified for me:

  • #1 –  I didn’t realize we were even still doing it, it was a policy I had put into effect a few years back and it was absolutely redundant. Cancelled.  
  •  #2 – This was an item a service provider required and it is very important, except we had dropped the vendor long ago but kept the process. Cancelled  . 
  • #3 – This is something that actually makes sense but the person didn’t understand why we needed to do it. Once I explained it better the person was on board.

There you have it. This entire process took about 20 minutes and the result – eliminated 2 things that we were wasting money on and helped an associate understand a process they thought was a waste of time. All in all a pretty good return on my investment of 20 minutes.

Moral of the story… If you want to “unfool” yourself you’re probably going to need an opinion other than your own.