Be careful who you take as a partner

by Philip Toppino

We are coming to a close on my seven part series of articles, this one being close and dear to my heart. I selected this topic as the main subject in order to cast another perspective of a business partner after the honeymoon is over. They say marriage has around a 50 percent success rate, and it’s probably no better for business partners.

My first real taste of the business world came when I became my own “principle.”  Sure, I was in the work force for years before that but it’s an entirely new universe when you work for yourself, have more than 10 employees and you enter the exclusive club of less than 1 percent of the population. I now have over 30 employees who depend on our business to help support their families and with that comes great responsibility. I wanted to make a difference for the people that worked for me and also the partners I chose to work with, giving them every opportunity to succeed if the business did. I worked very hard to treat them as I would like to be treated. Over time and with experience I’ve realized that “if you can’t take care of yourself, you can’t take care of anyone else.”  In summary, this article is going to show and explain how and why to do your due diligence.

Often I speak with other young (under 40) business owners about the jaded nature of older business executives. If they have ever owned a small business they seem to be cranky and pessimistic when it comes to business partners and employees and I find myself becoming one of them. Don’t get me wrong, seasoned business owners are very nice people but when put in a business situation they suddenly get cold, sometimes cut throat, most always assuming the worst and I am learning why. I promised myself that I didn’t want to grow up into a cranky, pessimistic old man and I would always try to look for the best in the people I worked with and those who worked for me. Starting off that way I’m now here to tell you to be careful who you take as a partner in business. I started my first business over 10 years ago folks and I can tell you this 35 year old feels more like 70 years old now. And that optimistic, young business owner has been taken advantage of enough to earn some good battle scars. Today we’ll explore some real life scenarios on when a good business relationship goes bad, what you should do when a partner changes your agreement without telling you and what red flags to look for so you can act before it’s too late. Let me say that again and pay attention—what red flags to look for so you can act before it’s too late.

When a Good Business Relationship Goes Bad

I know some of you have read relationship books and if you are a guy, your “better half” likely reads those Cosmopolitan magazines. If a woman is carrying one of those magazines and has a pen, she’s likely taking some quiz and it always says, “you are an idiot.” Joking aside, those quizzes and psychological tests are a great way to see upcoming behavior issues in people and if you are in that relationship you had best address them before they get worse. Now, apply that situation in a business relationship. I always like to use the expression, where there’s smoke, there’s fire. When you have a large financial stake in your partners/workers emotional and financial well being, a good business owner will constantly scan for potential changes in them that may affect the company. In the end everything is about the company and what’s in its best interest. Always remember to act in its best interest and you will stay above all the internal, political fallout and bad employees attempting to murk up the water to try to conceal their intentions.

What You Should Do When a Partner Changes Your Agreement

Change is constant yet people seem to handle it differently and everyday you are either moving ahead or falling behind as a person and as a company. Make sure all the legal paperwork is completed and agreed upon before you open a business, a sort of prenuptial agreement so when change does happen, all the hard choices are already made. If partners agree to a five-year business plan and half way into it one partner wants “out,” what happens?  If your partner isn’t pulling their weight, if they are an absentee owner or if they become disabled or die, then you would be dealing with their spouse, family or estate. Who makes decisions on their behalf?  All of these potential situations and questions should be agreed upon upfront with an attorney in the form of a buy-sell agreement, operating agreement, disability buyout and articles of organization.

Do your research and never rush into a business relationship, rather, treat it like a serious personal relationship. You do not want to rush into a business partnership until all points are covered.  A business partner who turns bad can pose a very scary situation because you are financially married to this person for better or worse, in sickness and in health, until death do you part; or you spend a lot of money getting out. Let me say that again, without the legal paperwork in place ahead of time, you will spend an immense amount of money getting out of the partnership.

Sure, you decided to jump into a business with someone who seemed competent, they were family or a family friend, or better yet you approached them because of their perceived work ethic in another company. Listen very carefully when I tell you that 95 percent of people are 180 degrees different personally vs. professionally. They may be a great worker and be successful in business but personally they may have a drinking problem, or they may be a great salesman and bring in new accounts but have a gambling problem and spend every dime they make. You may have a worker/manager/operator who is great at what they do but most will make a terrible owner. Most people don’t understand or can’t even handle long-term responsibility and time commitment and ultimately self destruct. Yes, you are correct in assuming there are those diamonds in the ruff that could prove me wrong but again, I’m talking the overall majority and that’s why you look closely at everyone and assume a 99 percent failure rate if you rush into a partnership.

Business owners or the person signing the checks typically never see the partner/ employee personal problems until it’s too late because I often say, “When you are the big dog, you always get everyone’s best. They stand taller when you walk in the room, and if there’s a problem you are the last one they want to see it.”  You won’t see it at first, but over time self destruction on a personal level will always bleed over into business so take your time bringing on a partner or allowing friends close to your business. Running a small business is hard enough and banks are making it almost impossible in these financial times; the last thing you need is the person you count on to fall apart because of a personal issue. Do your research; it’s not enough to know someone personally, you must not rush into things and make sure of a few key points for a business relationship to work.

1) There should be equal “skin” (money) in the game and you both must have something equal to loose and more importantly care about losing it.

2) Just like with a prenuptial agreement in a marriage, any and all circumstances should be discussed and agreed upon in advance.

3) There needs to be a forced buyout clause in writing that either party can force the other out for a specified amount, typically tied into the performance of the business based on a formula. That way if the business is doing well and you aren’t getting along—you part ways and take your money, and also if the business isn’t doing well and it’s due to a partner not living up to their end of the agreement, you give them their papers and send them packing.

If any of these three things can’t be worked out, walk away, look for another partner or don’t start the business. I’ve said that you will make your money on the deals you don’t take rather than the ones you do take. I’ve been in business with family and thought that knowing them personally was enough. This couple had marital problems, which they did an excellent job of hiding, and at the end of the day ended up costing me over $20,000 and countless hours of my life wasted. If I had just taken my time, I might have seen the smoke before the fire. In the end, the relative’s personal problems became my problems and I’m telling you because it caused more damage not having proper documents in place than if I would have pushed the issue up front. Always have a document legally recorded if the stakes are high.

What Red Flags to Look For

Change is the only constant and the one thing I’ve learned is that people change over time. Most change for the good but sometimes this change turns self-destructive. The goal is to see this change happening and determine whether it can be treated and saved or if it is cancer and must be cut it loose before it kills you. Easier said than done right?

Do your homework upfront in the form of a background check. You must also observe the person in stressful situations to see how they handle stress before you jump into bed with them. That will tell you a lot about their work ethic and character. I tend to now lean towards employees who are married with children. Employees without kids seem to be a flight risk and tend to make decisions as the wind blows.

I know this may offend some of you but it’s definitely not the majority. The majority of workers live in fantasy land and are masters of rationalizing their actions. Many young workers who grew up in the most recent golden years (1994-2007) of our society have a warped sense of financial reality. The best example of what’s happening right now is in the country of Greece, which will shortly be followed by Spain and others unless they are bailed out by the eurozone ministers, along with the International Monetary Fund. If you don’t watch for red flags and act on them when the fire starts there won’t be an international monetary fund to bail out your small business. Whatever our current president tells you, he isn’t coming to bail us out anytime soon. Small businesses are not irresponsible enough nor big enough to qualify for a tax payers bail out but hopefully with a little hard work we can help ourselves out like the rest of this country should.

Philip Toppino is the owner of Elite Car Wash and Elite Lube in Clermont, Fla. He offers consulting services for the professional car wash market and specializes in real estate development. You can reach him at ptoppino@gmail.com. Visit his web sites at www.toppino.com or www.elitecarwash.com for more information.