Ask the Hard Questions Now Before the Hard Times Come
It’s your business, so you get to make the rules.
Business is often said to be a simple process of identifying problems and finding solutions as needed. This solution-on-demand approach might be adequate for many typical day-to-day problems of business. But when it comes to the core decisions about protecting the wealth tied up in a business, and its owner’s ability to eventually cash out and retire, the solution-on-demand approach will fail you every time. The bigger plans about owner wealth and entitlements require a pre-emptive approach.
Business never becomes easier each year; your ability to successfully manage it increases.
– Drew Browne.
Ask the hard questions early and write down the answers.
Working with other people can help accelerate your success, but also increases the risk of disagreement and misunderstandings. Difficult times in business will always occur. No one likes to think about that too much. Even fewer people have a backup plan in place to deal with the inevitable future problems of being in business with others.
Is this relevant if I’m friends with the people I work with?
To win any meaningful game, we all need to know what the rules are. We all need a level of confidence they’re known and predictable so we can feel more stable about how our future might look. When the rules aren’t clear (or clearly absent) during potentially stressful times, everyone feels more uncertain, and that hinders their ability to deliver their very best work. That’s the same in business relationships too.
Having a written Business Owner’s Agreement in place will save you grief later on, because it allows you and your partners to agree ahead of time, about how to handle core decisions before they’re needed. Once in place, the day-to-day operation of your business will run smoother and potential disagreements will become much slower to escalate into a full-blown crisis, simply because expectations are being better managed between the owners.
If you’re fortunate enough to work with friends or family, that’s, even more, a reason to take the proactive step to respect those relationships and document your understandings and expectations of each other. It’s like brushing your teeth; it’s something sensible you do because nobody wants to suffer the expensive and avoidable root canal treatment that careless neglect brings later.
What’s actually in a Business Owner’s Agreement?
Think of it like a personalised rule book for your business, where the expectations of owners, partners and shareholders are documented and agreed upon ahead of time.
Begin your business rule book with a chat about money and entitlements.
Your Business Owner’s Agreement can provide much-needed clarity and peace of mind for the inevitable ‘growth and direction challenges’ of a business.
It can set out the agreed rules about:
- Financial protection for business owners, the partners and their families.
- What debt and revenue protection strategies should be in place.
- Document how the business will manage ongoing entitlements to income, should a business owner or shareholder become long term sick or disabled and unable to work.
It should document your agreed answers to a list of specific core business management questions, and always include a dispute resolution mechanism should the parties ever come to a deadlock.
There is a lottery nobody wants to win, and you need to manage the additional risks of doing business with multiple people.
These are the statistical facts of life you cannot escape:
- 1 in 3 Australians is touched by cancer.
- 1 in 4 Australians will have a long-term disability that will stop them working for at least three months.
- 1 in 10 Australians will die unexpectedly from accidents or diseases.
- 1 in 20 will become totally and permanently disabled before 65.
In business, risks usually increase with the number of people who you work with and rely upon. If you don’t make proactive decisions about core management rules and expectations today, you (or your family) could later be forced by external circumstances, to try and negotiate hard decisions from a place of vulnerability, all at the worst possible time.
Making core decisions ahead of time in your business owner’s agreement removes that problem.
Take the 7-question challenge and compare written answers and expectations.
If you have two or more business owners or partners, I challenge you to each separately answer the 7 questions below then compare your written answers and see if they match. Then if you’re brave, have all the spouses of the business owners or partners answer the same list of questions and then compare expectations.
Think you understand each other well enough not to bother? These simple questions will test how well you understand each other’s expectations and attitudes, to these common issues of being in business with others.
If one of your business owners, directors or partners became sick or injured and couldn’t work, what’s the agreed expectation on how you’ll deal with these everyday situations?
- How long can they be off work sick and still entitled to a full salary?
- Can they withdraw funds from the business for medical use, and how much?
- If they become unable to work for more than 12 months, for how long are they entitled to continue to draw an income from the business? Indefinitely?
- If they become long term disabled and unable to return to work, what happens to their shares in the business?
- When can they withdraw their own personal guarantee from the company trading debts or supplier guarantees?
- Who holds the businesses ‘power of attorney’ allowing another person to make decisions for a director who can’t participate in business decisions due to sickness or injury?
- What happens if the remaining business owners or partners are not able to buy out their partner’s shares in the business if needed, due to an unexpected sickness, disability or death?
The hardest question is the one your spouse and children expect you’ve already answered. If putting a business owner’s agreement in place is languishing at the bottom of your very big list of things to do when you get around to it, my professional recommendation is to give it priority. Because your children and your spouse probably think you’ve got this sorted and in place already.
Every small business ‘needs its own book of rules’, agreed upon ahead of time. How you prepare for the hard questions today, makes all the difference to the future of those who depend upon the stability and success of your business tomorrow.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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