After surviving several tumultuous business partnerships, Susan Nilon has learned to be more skeptical and cautious. In the past, she admits she was so excited about business possibilities that she “didn’t pay attention to red flags.”
She and her current business partner in a legal research firm, De Novo Law Services, not only have a formal partnership agreement, they’ve taken it one step further. She created an addendum to the agreement “writing out 10 steps on how to survive our partnership,” she says. This document spells out the things that are not normally called out in a contract, like how to handle disputes and what to do when the other partner is not pulling their weight.
Business partnerships can bring together individuals whose complementary skills and experience can help the venture succeed. And sometimes a partner can contribute valuable resources — including money — to help fund the business. But these arrangements can also result in headaches or heartache.
Here are nine ways to vet a potential business partner and (hopefully) avoid those headaches:
Do Your Own Recon
Spend some time researching your prospective partner online. Review their social media accounts. Do their tweets or Facebook posts jive with the person you think you’ll be working with? Do you want to be professionally associated with them? Be sure to go back a while in their timeline: there may be older information they forgot about that provides valuable insight into their thinking and character. And don’t overlook a social media platform just because you don’t use it yourself.
Similarly, when you conduct your online search into their background, don’t stick to one search engine. Dig a little deeper. “Different articles will be highlighted on different search engines,” says Nilon.
Listen to Your Gut
“First thing is don’t ignore the little voice that says hold off or slow down,” warns Garrett Sutton, a small business attorney who is the author of numerous books including, Start Your Own Corporation. He’s seen many partnerships sour and even sink businesses. “Too many people, when they are getting into a business deal they are all excited, but maybe there are nagging thoughts that maybe this isn’t right.”
Nilon suggests meeting your prospective partner for lunch and treating it as a “quiet” interview. Watch carefully how he or she treats the waitstaff and others you may encounter while you are together, she advises.
She remembers visiting a business she and her former partner planned to purchase. She watched him dig a three-ring binder out of the trash and grill the receptionist about why she had thrown it away. (It was broken.) In hindsight it was a warning sign, she admits: he turned out to be a micromanager who often focused on minutia.
Have ‘The Talk’
“What do you really want out of this relationship?” It’s that awkward question that often comes up when dating. That question, along with “What do you really want out of this business?” can be just as awkward. But it’s essential you have that conversation.
It’s “truly like a marriage,” Nilon points out. Avoiding these difficult conversations can have long-term consequences. She compares it to a relationship where “you don’t talk about wanting children before you get married. If you find out your partner doesn’t want kids and you do, the relationship might not survive.” She adds: “Knowing how you see the future and communicating that to the other is a key step to avoiding disappointments.”
With more than twenty years of experience in human resources, Ben Martinez knows as well as anyone how crucial it is to find the right people to work with. But even he learned the hard way how challenging that can be. He runs two very different businesses — STS Talent (an HR and recruiting firm for high tech businesses) and Sumato Coffee Company.
When he founded Sumato Coffee, he brought in a business partner he had worked with in the past. She was smart and capable, but he discovered she was in a different phase of her life than he. It was soon apparent that she wanted to devote more time to building her corporate career. “We had to part ways,” he says. In hindsight, he wishes he had asked more questions about what she wanted out of the business and her life.
Another partner he brought in later loved the product but he discovered she wasn’t as excited about all the work that goes into building a business. “She was mainly in it for the money,” he observed. “She was passionate about coffee and ecommerce but the work ethic wasn’t there.” He parted ways with her, too.
Have a Money Talk
Figure out how to handle money up front. What do each of you bring the the table and how do you value that? How much do each of you get paid, and how long can each of you go without receiving a steady paycheck?
“In an LLC you can provide profits based not on the percentage of ownership but on the amount of time spent in the business,” explains Sutton. “And even with an S corp you could have a salary or bonus based on the amount of hours put in. The person that doesn’t contribute wouldn’t receive as much compensation. Then buy sell agreement could allow a partner to buy back the shares at low value” if one partner wants to get out.
You can check business credit on any business, so if your future partner is an entrepreneur, consider at least running a commercial credit check on their businesses. (This guide explains how to check business credit on another business.)
While there are dozens of places you can check your own credit for free, it’s not as easy to check someone else’s personal credit, and you’ll first need to get permission from your future business partner. In fact, unless your run a business that already obtains credit reports on job applicants, they will likely have to get their own report and share it with you.
Run a Background Check
Your local courthouse can be a source of information about lawsuits or other public record information. However, keep in mind this information will be limited to actions taken in that jurisdiction. And it may even be inaccurate. It’s not unusual for people with similar names to be mistaken for one another for example. (Millions of court judgments have been removed from credit reports recently because they couldn’t be thoroughly matched to the right person.) “Courts do not conduct criminal background checks,” warns the National Center for State Courts on its website.
For those reasons, purchasing a full background check that you both agree to review together may be a better bet. A background check that includes credit, criminal proceedings and other details will likely require the permission of the person on whom you request the report so be upfront with your request.
Every business owner interviewed for this article agreed that background checks can be useful. “Certain crimes could prevent you from raising money or obtaining government licenses,” points out Caton Hanson, cofounder and chief legal officer of Nav. And “IRS or states taxing authority problems could get you entangled with their problems,” he warns.
If you’re serious about the business and willing to spend the money, you may even want to hire a private investigator who can dig up more than you can likely find out on your own.
Do a Compatibility Check
Even if your partner is squeaky clean that doesn’t mean the two of you will work well together. Different personal and working styles can quickly drive a wedge in the relationship.
One big wedge driver: a partner who feels entitled because they came up with the idea for the business. “People put too much value on whose idea it was,” says Hanson. “Ideas are a dime a dozen. There are two things that matter: money and work. You can’t have a successful business without them.”
Hanson’s business partner Levi King and he have developed something they call the “St. George test.” It basically means asking themselves to imagine a 3-4 hour drive from Salt Lake City, where Nav’s primary office is based, to St. George, Utah with that person. “Could you do it and not go crazy?” Hanson laughs. “You need to really like your business partner.”
You can also use more formal assessments such as personality or work style tests. Consider springing to get them professionally administered and reviewed by an HR professional or someone trained to analyze and help interpret the results.
Hanson says King had him take a sales aptitude test and a personality quiz to “make sure we didn’t clash.” Martinez says these types of tools can be helpful to raise awareness of your partner’s styles or to find complementary work styles but it’s important to “get clear on what you are using it for.”
Try a Practice Run
If one of you has an existing business, consider hiring the other person for a project or limited period of time to see whether you work well together. It’s not foolproof, though, as Martinez learned. It’s probably more like dating than marriage — with both partners trying to make a good impression — but you will be able to get a better sense of how you might work together.
That’s what Hanson and King did. King hired him to work for him in a different company before they founded Nav together. “The work we did was almost like working together like business partners,” Hanson says. It gave them confidence that they could indeed succeed as partners.
Get it in Writing
If you’ve decided to proceed with a partnership, spring for a formal partnership agreement written by an attorney. Hanson shared the story of a business he knows that won an award that earned them a lot of attention, and eventually they were able to raise venture capital. The partners had no written partnership agreement, however.
“One of the partners was sitting at home playing video games,” he says. But because he owned shares in the company, the partners had to buy him out.
Even though you may still be in the starry-eyed stage, think through some worse case scenarios.
What happens if the partner dies, becomes incapacitated or needs to get a full-time job to support themselves or their family, for example. “You can create a buy sell agreement that says if one person abandons the projects they lose all their shares,” explains Sutton. “If they commit fraud they are out of the business. If they get divorced, only the person you entered the deal with can be an owner — the spouse can’t be granted those shares. A good attorney can prepare a buy sell agreement that can cover all these contingencies,” he advises.