BY KATHERINE HEEKIN | OB GUEST COLUMNIST
Picking a business partner is not much different than choosing a spouse or life partner, and the business break-up can be as heart-wrenching and costly as divorce.
By Katherine Heekin | OB guest columnist
Picking a business partner is not much different than choosing a spouse or life partner, and the business break-up can be as heart-wrenching and costly as divorce.Money, Ego, and Power is the three-headed monster lurking in the shadows of every business partnership. Blind in the beginning to our own faults and our partner’s, over time all we see is fault, and feel resentment, unless the business was built upon trust, mutual respect, open and honest communication, and loyalty. These time-honored qualities are written into partnership and corporate law as the fiduciary duties of loyalty and candor. They are the equivalent of marriage vows. Most often, they are violated because of Money, Ego, and Power. When that happens, a nasty business divorce in court may seem inevitable, but it does not have to be that way.
Similar to pre-marital counseling, before agreeing to partner, ask the big questions that reveal your potential partner’s values, attitudes and flaws. Too often partners say “yes” before really knowing with whom they’re partnering. Here are must-ask big questions:
What’s your credit score? Do you have any loans? Have you ever filed bankruptcy? In your personal life, how do you like to spend your money? How many credit cards do you have? What is the balance on each one? Do you gamble? Do you have a savings account? Have you ever been in a lawsuit? If so, why, and what was the outcome? Do you know the difference between good and bad credit? What does money represent to you? Why does money matter? Are you motivated by money or gold stars? Who should get paid first each month? How should we divide up the money that we make? Who should pay if the business loses money? What are necessary expenses? What are discretionary expenses? Do you know how to read a financial statement and do you understand debits and credits?
After reading these questions, you may feel as though you could never ask them because they are too personal and talking about money makes you uncomfortable. The cold, hard truth is that far more pointed questions will be asked and answered in the lawsuit between you and your business partner if the business relationship sours. Spare yourself the agony of having to say, “But I trusted him.” Trust is not given; it is earned. Be sure your business partner has earned it from you by answering at least these questions before you say “Yes.”
Inevitably, after earning your trust, your business partner will violate it. At that exact moment, Ego comes into play. By asking the following questions before saying “yes”, you will find out if your potential partner is capable of resolving differences graciously and respectfully.
Ask: Have you been divorced or had a terrible break-up? Whose fault was it? Under what circumstances is it a good idea to tell a lie? What was your most embarrassing moment and how did you handle it? What has been your greatest failure? What did you learn from it? Whose accomplishments do you most admire and why? When a business succeeds, who deserves the credit? When it fails, who deserves the blame? Describe the way in which at least three people of the opposite sex are better than you in business in a way that you wish they were not.
There are no “right” answers to these questions. They are meant to reveal your potential partner’s character. Pay attention to what is said and not said, how it is said, body language, and your gut reaction. Again, do not be afraid of personal questions. In the future, your partner’s personal life and character will impact you and the business for better or worse. Be ready.
Unequal power is the most dangerous dynamic for business partnerships. Power is expressed in ownership percentage and voting rights.
It is common for a majority owner to exclude a minority owner from decision making when he or she no longer wants to hear what his or her partner has to say. Greed is another reason a majority owner often cuts off communications and votes a minority owner out of the business. The majority owner may believe that the minority owner has bad ideas, is undermining the business, or has not done the work promised in exchange for the minority owner’s share of the profits. On the other hand, the minority owner may be concerned about the majority owner’s misuse of funds, mismanagement, and bad business sense.
When opposing views such as these develop, too often business partners engage in power plays that backfire, typically resulting in a lawsuit. This situation can have even worse consequences in a family-owned business where professional and personal lives are intertwined.
Upfront planning is essential to stave off damaging power plays. Before saying “yes”, each business partner should hire his or her own lawyer, rather than share one, to draft agreements that will protect him or her from misuse of power by the other. Sharing a lawyer is a bad idea because the lawyer will be unable ethically to advocate for both of your individual interests. Invariably, after a business relationship fails, owners wish they had hired their own lawyer at the outset to negotiate the business partnership’s terms more wisely. Being forewarned is forearmed and smart business.
Katherine Heekin is an attorney, certified fraud examiner and founding partner of The Heekin Law Firm.