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What are the Red Flags to Look Out For in Your Partnership?

March 31, 2023 Business Disputes

There are many benefits to forming a business partnership. If you are just starting up then having a partner means that you will have help with the seemingly endless list of tasks that comes with forming a new company. Also, if you have an existing business, bringing on a new partner can increase the number of customers or clients you can service. There are, however, problems that can quickly arise if you make a poor choice of business partners. 

If these problems are allowed to exist for too long, then the partnership may very well fail. Also, a bad business partnership can result in you facing liability for business debts stemming from your partner’s poor decisions. Fortunately, there are red flags to look for that can give you the warning sign that you need to change your business practices or dissolve the partnership. This article will discuss how you can recognize these red flags and potentially escape the negative consequences of a failed business. If you have questions about your situation or need assistance, contact us to speak with a New Jersey commercial litigation attorney.

Frequent red flags that arise in business partnerships include:

  • A partner focusing on their income, as opposed to business success
  • A partner’s inability to bring in clients or customers
  • A partner’s inability to perform their core work without your assistance
  • A partner not being transparent about their customers or clients

These red flags can result in a business lacking sufficient capital due to a partner focusing on their own paychecks and withdrawals as opposed to investing back into the company. Also, they can result in you simply splitting the business you already had with someone who is unable to perform their job without your assistance. Now let’s look at the warning signs that can help you to avoid these problems.

Red Flags in a Business Partnership

A partner prioritizing their own income over the business’ finances

It is common for business partners to believe that they are entitled to regular paychecks or distributions as if they were a salaried employee of the company. This can result in situations where the company is paying money to a partner even though the funds are needed for future operations or immediate business expenses. At best, such situations result in the business not being able to expand. At worst, they result in the company failing due to a lack of cash reserves during “lean” times.

A partner’s inability to bring in new clients or customers on their own

It is a regular occurrence for someone to bring on a business partner believing that the individual will be able to add additional customers or clients to the company. Unfortunately, the new partner may have lacked the networking connections or advertising resources which they claimed to have. This can create a situation where you are simply splitting the business which you already had with another person. This likely means lower profitability than you enjoyed previously.

New partners may not be able to perform their own work without assistance

It goes without saying that you expect your new business partner to be competent at the core service that your company provides. It is not uncommon, however, for individuals to lack the expertise they claimed to have. This is especially true in professional service businesses such as law firms, accounting firms, medical offices, etc. These types of situations result in you having to share the profits with an individual who likely would not even make a qualified employee.

Partners not being transparent about the status of their customers or clients

Most business partnerships are structured in a way where one partner manages his or her own clients and customers. The second partner then independently manages their own clients or customers. There are instances, however, where your partner may have trouble brewing with the handling of their client base. Unfortunately, you do not find out about it until a small problem becomes a major business crisis. Such instances can result in financial losses and even legal liability.

How Business Partners Can Protect Themselves Before and When Red Flags Arise

The above-referenced red flags are more common than many may think. Fortunately, there are steps that can be taken, both at the onset of your partnership and after operations begin, which can protect your interests. The following are examples of such steps.

Have a partnership agreement that spells out compensation and do not deviate from it

Disputes over a partner’s compensation and distributions can be more easily avoided by having a written agreement that clearly governs such issues. This agreement should detail the percentage of profits which can be distributed to partners, the timing or intervals of such distributions, the percentage which must stay in business reserves,  etc. Just as important is the fact that this agreement should be adhered to (which is something many partnerships struggle with).

Verify that your partner has their own business sources and has provisions that protect you in your partnership agreement

People often build themselves up to be more than they are when attempting to gain a new business partner. During the initial stages of forming your partnership, take steps to ensure that someone can bring in the level of business which they are promising. This can include auditing their books to verify the existence of marketing resources, meeting referral sources, etc. Also, your partnership agreement should include provisions that place responsibilities upon the partners to bring in a certain percentage of the company’s customers.

Verify your partner is competent at their craft and require them to operate independently

If you are forming a professional service partnership, you can take steps to ensure that others are competent at their craft. This can include, among other things, checking to ensure that your new partner has not been reprimanded by a professional licensing board. Also, once your partnership is formed you should, within reason, expect your partner to work independently without you “holding their hand.” The longer you allow yourself to essentially oversee their work then the more difficult it will be to cure the situation later.

Hold regular meetings to discuss the status of customers or clients

Once your partnership is operating, it is important to hold regular meetings at which you will discuss the status of projects which are being worked on. This is where your partner should be telling you about problems arising in their projects. If a pattern emerges of problems not being disclosed, you must consider putting quality control procedures in place or dissolving the partnership.

Contact a New Jersey Business Dispute Attorney Today if Your Partnership is Displaying “Red Flags”

Contact us to speak with a New Jersey business dispute attorney if you are involved in a partnership and believe that trouble is on the horizon. Daniel P. Silberstein has been assisting business owners in our area for more than two decades. Contact our Cranford office online or by telephone. In addition to servicing Union County, we help companies throughout the state. This includes those in Elizabeth, Newark, and elsewhere.