Many early-stage businesses operate successfully on trust because relationships are typically few and direct to begin with. The risk emerges when the business scales, but its agreements don’t scale with it. More customers, employees and suppliers mean more dependencies and more opportunities for people to remember an informal agreement differently.
Formalising these relationships doesn’t mean every single interaction suddenly needs a lengthy legal contract, but it does mean identifying the relationships where an unresolved misunderstanding could have a meaningful financial, operational or legal impact on the business, and making sure the important terms are clear and recorded.
Start with the founders
Perhaps the most important agreement is one that entrepreneurs can easily overlook – the agreement between the people who came up with the business idea and got the ball rolling.
Maybe it started organically and, over time, became more commercially viable, or perhaps friends, relatives or long-time colleagues started a side project believing they were fully aligned on where it was headed. Regardless of how a business starts, as value, responsibilities and opportunities grow, assumptions can quickly diverge. Who owns what? Who can make which decisions? How will profits be distributed? What happens if more capital is needed, one person wants to leave or the owners reach an impasse?
Documenting how these relationships will be governed is good and gives everyone a common point of reference if circumstances change down the line. Depending on the structure of the business, it’s advisable for all entrepreneurs – seasoned or not – to obtain professional advice on the appropriate agreements for their circumstances.
Clarify employment relationships from day one
As a new business owner, your first official hire represents another important transition from informal to formal arrangements – something that is legally required.
In South Africa, Section 29 of the Basic Conditions of Employment Act requires employers to provide employees with specified particulars of employment in writing. These include matters such as their role, place and hours of work, remuneration, leave and notice requirements. SME Labour Support, an initiative by the CCMA and Business Unity South Africa, specifically notes that having these details in writing and signed can help avoid future misunderstandings and disputes.
Beyond meeting legal obligations, clarity about someone’s responsibilities, remuneration and working arrangements means both employer and employee start with the same expectations.
Customer and supplier relationships count too
As a business grows, it becomes increasingly difficult for an owner to personally manage every customer and supplier relationship. It’s therefore essential that the terms underpinning those relationships are clear and consistently understood from the outset.
With customers, written agreements should establish what product or service will be provided, the scope of the work, pricing and payment terms, important deadlines or deliverables and what happens if requirements change or terms are breached. Depending on the nature of the relationship, businesses may also need to address issues such as cancellation, liability, intellectual property and dispute resolution.
The same principle applies to suppliers, particularly those the business depends on to deliver to its own customers. Agreements should clarify issues such as pricing and payment, delivery expectations, quality or service standards, each party’s responsibilities when something goes wrong and how the relationship can be terminated.
Ultimately, formalising an agreement – regardless of what it is and who it is with – shouldn’t be viewed as a sign of distrust. Well-written agreements can protect relationships precisely because they reduce the space for assumptions. They give both sides an opportunity to agree on expectations upfront when the relationship is working well, rather than leaving parties to interpret intentions after a dispute has arisen. In many cases, a clear agreement is not about preparing for failure but about creating the foundation for a stronger and sustainable partnership.
About the Author: Jeremy Lang
