Texas Business Dispute Blog

Monday, November 21, 2016

The Devil You Know: Pick Business Partners Wisely and Plan For Problems Ahead

By: Ladd Hirsch (Dallas)

Picking the devil you know in selecting a business partner may seem like a good strategy.  But the list of celebrities who have suffered financially in their dealings with business partners is striking with losses totaling millions of dollars in some cases.  Uma Thurman lost $1 million. Sting lost $9.8 million. Billy Joel lost $90 million.  And celebrities are not the only ones who have suffered negative results because they, like so many people, picked poor business partners.  Fortunately, there are steps that anyone entering into a long-term relationship with a business partner can take to avoid the financial consequences of a disastrous partnership.

Compromise is Not a Dirty Word in Selecting a Business Partner

Uncompromising business partners provide great material for biographers and screenwriters. But most people prefer to forge a collegial, productive business relationship rather than working with a stressful partner who makes everyone around him or her miserable.  There is a difference between a passionate visionary and a ruthless and unfeeling business mogul. But in the heady excitement of forming or growing a business, the lines between the two can blur making it easier to deny an uncomfortable gut instinct about a business partner, particularly when a promising business opportunity is involved.

The key to avoiding a disaster in selecting a business partner is thoughtful planning.  First, it pays to ask hard questions and conduct basic due diligence before making the decision to enter into a long-term business relationship.  Is the potential partner a person who can be trusted, who works well with others and who is flexible in dealing with business challenges?  Does the partner have a positive business track record, and will others vouch for him based on past experience they have had with him?  If the answers to any of these questions are no, these are major red flags that foreshadow future serious problems.

Second, even if a potential new business partner answers all of the hard questions with flying colors, it remains essential to put an exit plan in place – a written document that is binding on all of the partners.  That contractual safeguard ensures that no matter what happens in the future, including the death of a partner, a plan has been adopted providing for partners to exit from the company under the terms of a defined plan.

When a difficult problem arises, a partner’s true nature will emerge, and in these times of crisis, good partners band together to meet the challenge.  By contrast, a partner who does not tolerate dissent, and who believes that his ideas are the only ones that count, reflects a classic narcissistic personality that is unlikely to change over time.  When a crisis arises, this narcissistic partner will refuse to accept responsibility for any problems, and he will reject solutions from others because he believes he is the only one who has the right answers. One example of this type of dysfunctional partnership is currently playing out in the legal world. This link is to a news article sharing the unsettling story of two attorneys who worked as partners together for many years at a successful law firm, but who are now trying to destroy each other in a public legal battle.  

When the red flags start to pop up in regard to a potential business partner, it may be hard to walk away from what appears to be profitable business opportunity in hopes that the partner’s behavior or personality will get better over time.  That form of denial is rarely a wise decision, however, because a bad business partner is unlikely to change.  In fact, a narcissistic personality is so dysfunctional it may cause the business to fail in the midst of a partnership conflict.

Trust but Verify

One way for business partners to prevent small problems from turning into major crises is to make sure that each partner keeps his eye on the ball. Specifically, major areas of disagreement can arise in the business is when partners focus solely on their own area of expertise and give little or no attention to other areas that they are not handling.  By the time that they turn attention to the overlooked area, what had been a small problem has become a major crisis.

The most obvious example of this is a business in which one partner focuses on sales and marketing while another partner handles the company’s finances. When the partner in charge of sales realizes that all or most of the revenues they generated for the company have been spent in a way that they consider wasteful, it can be devastating to the relationship between the partners.

We are often brought into the picture at this point when one of the partners has engaged in conduct that the other partner is horrified to discover, and decides that legal counsel is needed to promptly address the problem.  At this point, a business divorce often follows.

It is critical for business partners to maintain a broad view of the business and to continue to stay abreast of all phases of its operations and performance.  Partners who focus on excelling only in their own area of the company are taking a serious risk of receiving an unwelcome surprise.

Make Sure to Have a Defined Exit Plan in Place

As we have emphasized in previous posts, planning ahead requires business partners to negotiate and adopt an exit plan. This exit plan can be triggered if the partners reach a point of impasse, allowing for one of them to exit the business in accordance with a structured financial plan.

The adoption of an exit plan will not prevent conflicts between business partners or preclude a business divorce from taking place. But, a carefully crafted exit plan that has been adopted by the partners may be all that stands between them and a nasty, prolonged legal fight.

Celebrities, They’re Just Like Us

Celebrities, like lawyers, are susceptible to choosing a bad business partner.  In fact, celebrities who do not have business experience may be more prone to choosing bad business partners.  But just because selecting a bad business partner can happen to anyone does not mean that it should. 

While it may be best to pick the devil you know in selecting a business partner, it is wise to also make sure the devil is locked into a written agreement that confirms an enforceable exit strategy. 


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