How to Get Rid of a Bad Business Partner: Tips for Entrepreneurs

How to Get Rid of a Bad Business Partner: Tips for Entrepreneurs
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The Reality of the Beast

Like it or not, business funding is not made on handshakes these days; you need to have strong credit and other valuable capital to obtain a bank loan or funding for that new business. Cash is king and if you don’t have it, it’s very tempting to bring in a partner with the needed cash, but what if this new person is a bad business partner?

This happens more often than not and for many reasons. An entrepreneur is so excited about the possibility of becoming a business owner that they don’t research their new partner enough and before they know it, they feel they have lost control and even threatened by the new partner. If this is you, are there ways to buy out bad business partners and keep your business alive?

Examples of a Poor Business Partner

Handshake Morgue File

If you have a bad business partner and want to get rid of them, you’re probably in one or more of the following situations

  • Business Control – You need money to start that business and your partner provided it but in return, you’ve allowed them to become the controlling business member even if they are just a silent partner. This is usually done when you incorporate and allow the partner more power than you have. In an LLC for example, say you put up 40% of the cash, but your partner came up with the remaining 60% you needed. However, your LLC bylaws say that your partner, not you, is the managing member and president of the LLC. In this situation, the bad business partner can rule your business.
  • Inept Business Partner – Just because your lifelong friend Ed says he’ll put up 80% of the cash you need, does old buddy Ed really understand how your business works? You may know all there is to know about the contractor business you just opened up and Ed, being an accountant, feels he knows more than you even thought he’s never been on a job and interferes with business decisions or forces you to make bad business choices. You go along because Ed threatens to pull out.
  • The Deal Maker – Almost every business struggles with cash flow, but if your business partner keeps making deals with friends to sell them your product or service at your cost, you are in effect losing money. Poor business partners do this all the time.
  • Silent But Deadly – Silent partners are bad business partners. We’re talking about individual partners here and not venture capitalists. They want a company credit card, access to bank accounts and if they have the power from the bylaws, they’ll do practically anything to bring the business down by spending, making promises, and even ordering inventory you can’t sell to name a few. They say they want no day-to-day involvement, but it seems they’re there at every turn making business decisions that can make your business go under.
  • The Hiding Partner – Maybe you got lucky and found a business partner who not only put up most of the cash to start the business, but then find you can’t find him! Your corporate bylaw papers say he needs to sign certain contracts and if you can’t find your bad business partner to get that signature, you’re stuck.
  • The Menace – These are the very extreme when it comes to bad business partners. At first, they develop a wonderful relationship with you, and then try to take control of the business to get you out so they own the business out right.

Please click on Page 2 to find out 4 top ways to rid yourself of a bad business partner.

Rid Yourself of That Partner!

Bowling Morgue File

In my years as an entrepreneur, I’ve had business partners that had some or all of the above attributes and believe me, it’s not fun to deal with them once you’re stuck. There are ways to rid yourself or even buyout a bad business partner. Here are some examples:

  1. Be Careful at the Onset – If you find a partner, whether they are silent or Johnny-on-the-spot, pick a lawyer you trust to write up the corporate documents and no matter what entity you use to form your business, make sure the attorney understands that you need to have the most “paper” power when it comes to your bylaws and articles of incorporation.
  2. Find Another Partner – This may sound ridiculous but often works. Once you find someone you want to approach, don’t whine and complain about your current business partner, but instead, show the perspective business partner what you can do for them as far as return on investment.
  3. Get a Loan – Your first thought might be, “I couldn’t obtain funding at the beginning of this venture so how can I get a loan on my own?” If you have at least one year’s worth of business history behind you and have inventory and equipment or perhaps even building or land, use that equity that can be used as a lien by a lender and take out a working capital business loan and use it to buy out your bad business partner. Even SBA loans can be tough to get in a bad economy, but if you persevere and turn that no into yes and keep searching for the right lender, you will be able to do this. It took me a year and a half to get a SBA Patriot Express loan because I didn’t give up and sought out many banks. The lender may want to lien your home or other personal assets during the repayment of the loan, but if you can meet the monthly payment obligations through your business, which is worse, a lien or a bad business partner?
  4. Get Out – If you have a partner who is making it difficult to run the business and is obvious about wanting to own the entire business, why not just let them? After all, how much family money can you continue to invest let alone dealing with the stressful situation you are in? Even if you lose the entire business to the bad partner and get practically nothing in return, keep in mind that if a buy/sell is done correctly, you can make that bad business partner be responsible for every single liability the business has allowing you to be free and clear of any business debt or obligations.

Please click on Page 3 to read about how to start fresh and new again after you’ve rid yourself of that bad business partner.

Starting Fresh

Fresh Tomato Morgue File

If you don’t have a controlling say in your bylaws, can’t find another partner or obtain a working capital loan on your own and find you do have to get out the business through a buy/sell to the bad business partner leaving you essentially nothing, don’t believe for a second that you’re washed up an entrepreneur.

Before you give up and find that day job you used to be good at, start by making a list of what you did right and what you did wrong. Be honest and realistic in your list. Were you steadfast enough? Did you allow the bad business partner to overpower your decisions? Did you have an idea that really worked? Think of your name and your customer base; how well did your customers like you? Did they ask for you specifically? Often, the good business partner (you) is the one your customers trust and want to see.

For example, I owned a business where I had no choice but to walk away and allow the sly business partner to take it over but that didn’t mean I was done. My good name and commitment to my customers and my community made it possible for me to open a competing business and my customers followed me and were not loyal to my former partner.

Once you have that list of your best attributes as an entrepreneur, you need to sell yourself; whether it’s to a business partner you’ve done your research on or a lender that is well-known for approving loans. Call the Small Business Association in your area and make an appointment. Be honest with the representative and have a great business plan along with tax returns and forecasted financials. Include a bio of your entrepreneurial skills including achievements and community involvement. Show proof on how you will be able to repay the loan if you are granted one.

Let the SBA representative help you find a lender that will loan you money based on what you know you can accomplish. Be prepared to find a lender that isn’t within your community. In these days, it’s nice to buy and do business locally, but in this situation sometimes you just can’t.

Almost every state has some sort of small business or business development center that works with the SBA and other organizations such as SCORE that can help you regain your entrepreneurial status.

Finally, read my tips on Motivating Young Entrepreneurs. Although you may be old hat in the business owner world, you’ll find tips on how to step over every stumbling block in your path; especially when dealing with, buying out, or ridding yourself of a bad business partner; and to be sure, you won’t make the same mistakes again.

Image Credits

  1. Dollar Bills (Morgue File)
  2. Handshake (Morgue File)
  3. Bowling Split (Morgue File)
  4. Fresh Tomato (Morgue File)