How To Lose Your Small Business in 10 Days – Day 10

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Day Ten – Lack of an Operating Agreement

Luigi has decided that enough is enough and he is going to hire competent legal counsel to advise him and Peach regarding all of the issues that they are facing. He has to salvage what he can of the business he loves. As he reviews Plumbing & Pizza Delivery’s bank accounts, he finds that there is far less money available to hire counsel than he expected there would be. Luigi confronts Peach about the shortfall. She admits that she has been giving a portion of the company’s proceeds to her lover, Toad, for lavish gifts and expensive vacations. After all, there was nothing that said she couldn’t, and she’s right. There is no Operating Agreement controlling how the partners use the company funds. As 50% owner, she can do as she pleases. Peach, who Luigi always knew was no peach, tells Luigi that she’d be more than happy to sell her 50% of the company to him. Unfortunately, her asking price is too high and Luigi is forced to stay in business with a partner that is clearly a detriment to the success of the company.

A Founder’s Agreement, and a subsequent Operating Agreement, is essential in documenting the understanding between business partners. Despite the belief that all owners involved in a business will always do what is best for the business, it is solid business sense to have those expectations in writing. While it is exciting to start a new business, serve customers and realize a profit, laying a proper foundation for success cannot be underestimated. Many potential issues can be avoided before they even begin and in the event there is a dispute, everyone can refer back to these documents and agree on the correct course of action.