Avoid Business-Partner Purgatory with These Helpful Planning Tips

As a business owner, I have had both friends and investors as partners—both not as great as I expected. The need for a partner is often due to lack of funds for capital startup and other business expenses. Part of planning for business partnerships may mean you need their outstanding financial credit background to enable the business to begin or move forward with business loans and credit.

If you are about to enter into a partnership agreement to purchase an existing business or to start a new business—beware; and this guide to business partners will help you tremendously to avoid costly mistakes.

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Personal Financial Statement – Any partner or investor should be willing to show you a personal financial statement that reveals his or her entire portfolio including investments.

Recent Tax Return – Most potential partners won’t mind giving you their most recent tax return either, unless they are hiding something.

Background Check – Get permission from the individual to run a background check. A background check can include many things such as criminal records, debts to the Internal Revenue Service, and liens on property as well as other pertinent information such as other names used in the past.

Resume – Sure this sounds sort of non-essential if the person claims to have loads of cash for your business, but a resume can reveal items such as knowledge, experience and education. For example, an attorney may not make for the best partner if you’re opening a clothing store—what retail experience would an attorney have? This is very important as even if the partner is not a controlling partner, they may use their financial backing to strong arm you into making company decisions you feel aren’t legal or decisions that won’t benefit the company such as running personal business expenses through the company for their gain.

Funding – Be blunt and ask the potential partner where the funds they are investing are coming from. One partner I had used his company’s pension plan to invest in one of my companies and years after the partnership was formed the IRS audited his financials including our company based on his lack of IRS reporting when it comes to investing in a business using a pension plan; this resulted in fines for both partners—me and him.

Shell Companies – Believe it or not I had a partner who utilized a shell company to invest in our partnership. Wherever the funds are coming from, especially if they are from an unknown source, check the business out first with places such as the state Corporation Commission and Tax and Revenue Department. These places can reveal much about a potential partner’s businesses and investments.

Beyond these initial essentials, what else should you find out when planning business partnerships?

Even if the business partner is someone you know well, never agree to use the same attorney to write the partnership agreement. The attorney you hire will have your interests at heart and will not let you sign something that is detrimental in nature. In some states, such as New Mexico, this is actually illegal if a dispute arises. Further, never try to pull a partnership agreement off the Internet. They are of the most basic kind and won’t apply to your particular partnership. It’s worth the investment to hire an attorney when planning for business partnerships.

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Please turn to Page 2 to learn more about what you should do before entering into any business partnership.