One of the key crossroads in the road to small business success – which almost every entrepreneur will come across at some point – is incredibly treacherous: the decision to take on a partner. The way you navigate it can mean the difference between success and unmitigated disaster.
Done right, a partnership can take your business to new heights and not only add someone to share the work, but also new perspectives, new expertise, and possibly new financial support.
“A partnership could mean your company has access to new products, enters a new market, blocks a competitor with an exclusive contract, or increases customer loyalty,” the National Federation of Independent Business, a small business advocacy group, said on a blog Post.
But business partnerships can also be catastrophic. In one of the most extreme examples, California’s Chris Smith died after an argument with his business partner Edward Shin. The two co-founded 800XChange, which specializes in generating leads for clients in the debt consolidation industry.
Shin, now 43, is serving a life sentence without parole after a jury in Orange County, California convicted him of first degree murder in 2018. Prosecutors alleged Shin committed the murder after Smith uncovered his plan to take hundreds of thousands of dollars from 800XChange to pay compensation for a previous conviction. Shin then covered up the crime for months by posing as Smith in emails to family members claiming he had sailed around the world on a yacht.
“You really have to get yourself into this situation. How would I feel if I spoke to my son and it was the very person who killed him? ”Private detective Joe Dalu, who helped solve the case, told CNBC’s“ American Greed ”. “To keep it going, to keep that hope alive, is really diabolical.”
Shin even used the email trick to negotiate a “deal” to break 800XChange on terms that were favorable to him.
Smith was 33 years old when he was last seen in 2010. His body was never found.
While most partnerships don’t end in such tragedy, 70% fail within 10 years, according to the US Bureau of Labor Statistics.
In order to increase the chances of your partnership being successful – and to make the matter less painful if it fails anyway – it is vitally important to have a formal agreement with your partner right from the start, according to experts.
“There are many transactions that are only done with a handshake and in good faith. And unfortunately that often leads to rather chaotic situations when things are no longer going well,” said attorney Andrea Tarshus to “American Greed”.
Based in Buffalo, New York, Tarshus specializes in small business services.
She said a written agreement should set out the company’s legal structure. The Small Business Administration says it is important to understand the different shapes and sizes of a business as in some cases one or more of the partners may have unlimited personal liability in the event of a problem.
A limited partnership or partnership, as the name suggests, can limit this liability. Or you can found a corporation that protects the owners from personal liability. There are different types of companies depending on your type of business.
Each structure has advantages and disadvantages and tax implications. It’s another reason experts say you should consult a lawyer before starting your business.
It’s also a good idea to include security precautions in your new company’s administrative documents, such as caps on the amount an affiliate can spend or withdraw themselves.
“When one of the partners goes out and makes a big deal, makes a purchase, or agrees to spend a certain amount of money on a project, or buy equipment, or sell property, or buy property, the other partner sits and goes. Why would you do this without letting me do it first? ‘”Said Tarshus. “Well, if you put a cap in your corporate governance document it would prevent this type of problem from occurring in the first place.”
Trust but check
You may think you know your potential business partner, but would you be willing to bet everything on him?
If not, check them out carefully.
This includes checking references and creditworthiness. It can also be a good idea for each of the partners to undergo a criminal background check.
“Criminal background checks, reference checks, résumé reviews, and then even being willing to share their personal tax returns for the past three to five years will give you a better understanding of whether they are able to cope with it Corporate money and what their personal history is for managing their own income, “said Tarshus.
If your partner is unwilling to open up, that in itself can be a warning sign, experts say. You should also be open to sharing your information
“If a person is unwilling to share with you, or be vulnerable, or let you glimpse their private life, then I would be really careful about doing business with them,” Tarshus said.
Smith and Shin met while working for another lead generation company in Southern California. While it is unclear how much care Smith took before the two of them did business together, he has made arrangements, including hiring his own attorney.
But Shin, a skillful scammer who cultivated an image of a church family man but was actually a scammer with a gambling problem, structured the deal so that Smith’s possessions were just under 50% and had no access to the company’s accounts.
Finally, investigators told American Greed that Smith had become suspicious. He asked Shin to give him the passwords for the company’s bank accounts and to co-sign all checks for $ 10,000. And he emailed his lawyer about his partner’s distrust.
“We need to make sure he has no room for cheating,” wrote Smith.
Shortly afterwards, Smith was dead.
Watch as investigators uncover Ed Shin’s trail of fraud, embezzlement, and ultimately murder. Catch a BRAND NEW episode of “American Greed” on CNBC only on Monday, June 28th at 10pm ET / PT.