The Owner Agreement

The owner agreement – that understanding between multiple owners of a business – is the fabric of the business and is the basis of how the business may be sustained. This owner agreement fabric has many threads consisting of the communications between the owners. These communications, including oral, written, and experiential, are woven together to support the decision-making to operate and sustain the business. There are not many businesses that can sustain long-term operation where there is conflict among the owners.

The term “agreement” suggests a written document, which might be seen as the woven fabric of the business, but that would be a mistake. The written agreement – if one exists at all – is but a single thread of communication in the fabric of the business. This understanding helps to define the term “owner agreement” as something much more than a writing. There are many multiple-owner businesses operating successfully in the short-term without a written owner agreement document.

The formation of a multiple-owner business comes after oral discussions and resultant communications through various media. The effectiveness of this communication depends on the candor of the parties and the quality of communication. The quality of communication is dependent on the lack of assumptions in the content of the communication. Communication, especially oral communication, is effective to the extent that assumptions are recognized and then removed. This discipline is lacking in most casual communication. The process of attempting to write a legal document forces the discipline that is helpful in removing assumptions.

When you ask a business owner to describe the agreement with the other owners of the business, the description from each owner is likely to vary. The reason for the variances are the unexpressed and unverified assumptions made by each owner. As the foreseeable events of the business cycle occur, the owners will react – each according to their self interest based on the assumptions not expressed to the other owners. To the extent of the quality of communication among the owners, the owner agreement will allow the business to sustain profitable operation.

The primary consideration is that owners will do what they perceive as being in their self interest, regardless of what may be written or otherwise communicated. There may be a variety of reasons, but notwithstanding any moral dilemmas, the idea that a written agreement will compel future action better than any sort of other understanding is thwarted by the cost of enforcement through the legal system and the time it takes to pursue such a remedy. The benefit of a written agreement is not that it is more enforceable, rather the benefit is that it causes a more precise means of communication.

In a competitive market where change is constant, a business must change to remain successful (profitable). This means that the agreement between the owners must allow the necessary decision-making to effect change. In other words, the owner agreement must support the process of planning. For short-term, operational planning, this may often be accomplished by reacting to events. While this reactive decision-making will not bring optimal results, in the short term many businesses are able to remain profitable. The threat to the sustainability of the business (continued profitability) comes when the foreseeable critical changes occur. These critical changes include a volatile change in the business environment, the death or disability of one of the owners, the desire of an owner to withdraw from the business, or the desire of one or more owners to sell the business.

Where the owners are not in agreement as to the long-term planning for the business, there will be conflict. This conflict is the major threat to the sustainability of the business. Where there is no effective communication between owners, the conflicting assumptions of each owner will not be discovered. When the critical event occurs, the inability of the owners to agree and act will prevent actions necessary to sustain the business.

Even where there is an owner agreement in place which supports decision-making producing both short-term (operational) and long-term (strategic) planning, because change is constant, the business fabric will wear and must be repaired. This means that there must be continuing effective communication between the owners. There is no more effective way of doing this than maintaining a written owner agreement.

The owner agreement is the fabric of the business. If the fabric is strong – the communications between the owners are without unstated assumptions – the critical changes that will occur in the long-term operations of the business will not impair the sustainability of the business. The most effective way to maintain the strength of the fabric of a business is to create and consistently revise a written owner agreement.