Choosing a Business Partner

I was reminded the other day of how important it is to “vet” anyone with whom you want to do business.

Certainly, in business, opportunities may present themselves that look almost too good to be true. That’s when your radar should go up and when you should take a good, hard look at whatever those opportunities are and who is presenting them to you.

I use the term “parade of imaginary horribles.” You must think of every horrible thing that can happen to you if you enter into a business partnership and protect yourself against such events.

A client of mine entered into a business relationship without knowing very much about their prospective “partner.” This was a transaction to purchase equipment in a business new to my clients and the prices appeared very reasonable – so much so that the buyers, my clients, agreed to the terms of the transaction before they investigated the seller.

You can predict what happened.

After spending almost a million dollars on the equipment, and waiting several months longer than they expected to receive it, the equipment turned out to be faulty, used, not suitable for the purposes intended and, in some cases, not even fully owned by the seller who sold it to my clients. The clients found out about the latter when presented with UCC filings on some of the equipment they had paid for showing it was owned by others, not the partner. Clearly, my clients were victims of a fraud.

Was this preventable? Probably yes.

If the clients had investigated the seller, they would have seen that the seller was in financial difficulty, had prior litigation with various partners and generally had a poor reputation for truthfulness. The result? Litigation and all the expense that entails and, although the clients proved the fraud and prevailed in the costly litigation, they recovered nothing due to the bankruptcy of the seller.

Why didn’t they pursue investigating the partner? In a nutshell, they moved too fast, got excited about the prospects of their transaction and forgot to check out the partner. This is a common and often tragic mistake that business owners make. The rule is that you need to spend at least as much time checking out your prospective partner as you do negotiating any transaction. Remember, the transaction is only as good as the partner. If the partner is a crook, it doesn’t matter how good the numbers look. And, there are lots of unscrupulous business people out there.

What can you do to vet your potential business partner?

First, find whatever you can find online about the partner. There is so much information available through public records that may prove helpful. Check out all business ratings services, circuit court filings in the area where the partner operates, corporate filings made where the partner’s business is located.

Have your attorney work with you and examine all potential costs of any litigation the partner may be involved in—in other words, if the partner loses any lawsuit they are involved in, what is the effect on the partner’s business and assets? Check out all UCC filings (which are public and available) to make sure anything the partner sells you is actually owned by them. You must know if your transaction with the partner could be interrupted by creditor claims.

Second, obtain recommendations from the prospective partner and call all references and check out all prior transactions. Ask referrals about transactions the partner may have been involved in that were not mentioned to you.

Third, require that the partner present to you all tax returns and financial statements for his or her business. Request the partner give permission for you to discuss the financials with any accountants and attorneys.

Fourth, get a bank reference from the partner, request that the partner authorize the bank manager to discuss financials with you and take the time to talk to the banker.

Fifth, if you cannot seem to find the information you need to make you comfortable with the partner, you have two choices. Run away or hire a private investigator. Believe me, the costs of hiring a private investigator will be far less than the costs of a bad transaction.

Finally, learn from your experience. Everyone in business makes mistakes – the trick is to make those mistakes less costly by investigating anyone with whom you do business. Stop and think before you leap into any transaction with someone you do not know.

GRC58920-Striegel, Lynda P2About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.