According to San Diego-based business attorney Robert J. Steinberger, 80 percent of business partnerships fail either because they are undercapitalized or partners can’t agree on how to manage their business (including finances). Confusion is inevitable when partners don’t talk about money distribution and payment policies in the beginning. Is your partner expecting to get paid on a monthly basis? Who is getting what percentage of revenue?
Since people obviously have different perspectives on money, it’s essential to discuss possible money issues upfront. The two most common problems are compensation and financial infidelity.
When it comes to spending money on additional equipment or tools, business partners often have different judgement. If there is no mutual (and written) agreement, also called Operating Agreement, about how money is being spent, conflicts easily arise. Different lifestyles can be another potential source of conflict. Many entrepreneurs who start a business compromise their own salary so their business can grow faster. If you have a partner who expects to get paid more than the company can afford, it is probably not in the best interest of the company to continue the partnership.
Financial infidelity can be hard to detect if there is no proof, so make be sure to establish a system for financial reporting. Another way to avoid fraud is to require both partners to sign checks that exceed a certain amount. Besides keeping track of your checks and balances, conducting a financial background check before signing a partnership agreement won’t hurt .
An Operating Agreement can provide the peace of mind you need to run your business smoothly. Find out more about our firm’s unique 4-step process of creating Operating Agreements.