A lot of people go into business with a business partner, sometimes friends and sometimes people who have a product or service which we like and can see great potential. We all talk about doing due diligence, but unless you’re looking to hire a private investigator to dig up dirt, then you probably won’t know the true person who you are doing business with until things turn bad or ugly.
Here are some helpful tips to help protect yourself at the start, without going into too much legal talk. One of the most important parts of going into business with someone is to due diligence on the person and the business. Because even friends have skeletons in their closet, it is better to know what you are going into, rather than working on pure trust and finding out too late.
- Ask for references about the person – both personal and business associates and listen carefully to what they say about the person, including what happens when things go wrong. How they handle things when something goes wrong is a good way to judge character.
- Have a look at the books of the business – You need to understand how good the business is trading and why they are looking for a business partner.
- Talk to Some Clients – Talk to clients of the business, ask what they like about the business and what they would like to change, this is always good feedback in relation to getting to know them better as well as knowing your business partner.
- Understand the potential of the business – Find out what market sectors (i.e. medical, retail, building and construction, etc…) which the business is currently trading and do some research on other similar businesses and gain a better understanding on where they are currently trading and who is successful.
- Understand your potential business partner – Identify their strengths and weaknesses, this will give you a better idea of how you can work together to perform the best for the business and this also gains a better idea of how not to step on each other’s toes, which can lead to conflict.
- Understand your potential Business Partner’s Financial Situation – If things don’t go well for the business, then both partners may need to contribute into the business, this can cause tension between partners and the last thing that you want is a business partner who is up to their eye balls in debt. They aren’t going to be able to contribute to the business and unless you have very deep pockets, then this means that you would have to cover this. Steer clear of someone who isn’t willing to show you this, even if they say they’re rich. Looks can be deceiving and many so called millionaires who spend big to appear rich also have massive debts to match their lifestyles.
Use a Good Professional Commercial Lawyer
Many lawyers say that they are good and they understand the law, but make sure that you have a specialist commercial lawyer, not someone who says they are a lawyer and can help you with your commercial requirements. Lawyers spend years specialising in their particular field, and experience counts, so be careful of a lawyer who says they can do everything.
The lawyer must understand 3 important components of business as follows:
- The Corporate laws for the country
- Company Constitutions and what a good company constitution is (this is the document given to you by your accountant/lawyer when the business is set up and helps in relation to the required governance of the business),
- Shareholder Agreement (this is a document which is drawn up when 2 or more shareholders/business partners start up a company and helps rectify any disputes and provides guidelines on what happens in different situations; like a ‘pre-nup’ for the business ‘marriage’).
Be careful about anyone who says they can provide a simple and easy document as this means that if things get ugly, then you have no real protection and the document may not be worth the paper which it is written on.
Keep Good Written Records
Any major decisions and/or discussion about the business should all be kept documented including in minutes, e-mails and records of conversations. You may not consider this as necessary, but if it gets ugly, this can save you, especially if you are partnered with someone who doesn’t keep records or keeps changing their mind.
If things get bad or ugly, these records can also help to head off any dispute, most disputes are due to one of the following issues:
- Bad communication,
- Bad financial situation for the business, one or the other.
If you keep good records about agreements on how the business had come to decisions. In a bad situation then these records can help to overcome misunderstandings.
If the situation becomes ugly, then these records have the potential to solve these issues, by showing your business partner that you have evidence to back up your side of the story.
There are other points which can help, but this is a start to helping you overcome any foreseeable issues before they start and if things start becoming bad, seek good legal advice and try to work through bad situations before they get ugly because ugly can cost a lot of money.
So think smart, plan for the worst and hope for the best, because not all business partners are bad or ugly, but there are a number of wolves in sheep’s clothing looking to prey on the unwary. Good luck and all the best for your business ventures with your new business partners.