Make Your Agreements Beforehand and Write Them Down!


Fred messed up.

Mike wrote a check for $200,000.

Everyone agreed that Wishful Contracting owed Mike $200,000.

It seemed simple enough. Wishful Contract would keep operating, keep generating a profit, and Mike would be paid back out of the extra profits.

It seemed so simple and so obvious that no one put any kind of agreement in writing. At the end of the first quarter, they had $20,000 extra profit, so they cut a check to Mike and he used it to pay down his line equity of credit.

Then they got a huge contract that substantially increased their revenue. Profits that quarter topped $50,000. Mike expected that he would get all of it. But Carl and Olivia expected to pay him $20,000 like they did last time.

Conflict ensued.

As they started debating it, the issue of Fred quickly came up. After all, it was Fred’s mistake that created the whole mess. Carl and Olivia didn’t want Fred to get any share of profits until Mike was paid back. Fred argued that he was still a full partner, and anyone could make a mistake and there was no reason for him to be penalized.

Always Make Complete Agreements and Write Them Down

Mike’s unspoken understanding was that he would get 100% of the profits until he was paid back. When they cut him the first check of 100% of the profits, he thought everyone agreed.

Carl and Olivia’s unspoken understanding was that Mike would get paid $20,000 a quarter. When Mike was happy with his first check of $20,000, they thought that Mike would be happy to be paid back over ten quarters.

All three thought that Fred should be penalized in some way since it was his mistake that caused the problem. Fred thought that it wasn’t fair. In fact, he argued, it was Olivia’s fault for not making sure they had the right kind of insurance.

The problem could have been solved easily if the Four Friends had actually talked it out beforehand.

When the partnership was in the middle of the problem, everyone feels it. Mike would feel it most of all since he’s the one who has to write the check, but everyone in that time recognizes that Mike is rescuing them.

Once Mike wrote the check, the problem went away, and Wishful Contracting got back to business as usual. After six months, the only one still feeling the pain is Mike. He’s still out $180,000 and some interest and fees.

From six months removed from the problem being solved, the only one still feeling any urgency is Mike. He’s paying a price for having solved the problem. All the others are feeling is that they aren’t getting any profits. Mike’s big price was six months ago. Everyone else’s price is felt over the next months and years. When the immediate gratitude for Mike saving them wears off, they are in much less of a hurry to get him paid back.

All they had to do was talk about it before Mike wrote the check.

Then they had to write down their agreement.

An agreement like this doesn’t require a lawyer. They just need to all agree and write down the essential elements of their agreement and sign it.

If I was advising the partnership, I would suggest that Mike’s payment be structured as a loan to the business with payments plus interest to be paid back to him. How quickly the payments would be made would be up to the partners, but whatever their agreement, it should be kept fairly straight forward, written down, and signed.