Spotting Red Flags in a Business Relationship

We all know the signs of a relationship in trouble, the little tipoffs that tell you when things are heading south.

Business relationships, however, have their own red flags and not everyone sees them.

As a lawyer whose practice focuses on business partnership disputes, I have seen upfront how ugly they can get, and I’ve noticed a few signs that my clients heeded too late.

Whether you’re thinking of getting into business or already are working with someone, here are some clues that problems lie ahead.

Breakdown in Communication

Is your business partner taking longer and longer to respond to emails? Are they brushing off your calls or skipping your regular catch-ups? There may be a reason.

Most people are uncomfortable with conflict and seek to avoid it. If your partner has come to feel like there are irreconcilable differences on where the business should go next, they may simply avoid talking with you.

Of course, all business owners disagree from time to time, but they’re able to reach a happy medium that allows the business to move ahead. However, if your partner has suddenly gone mute, it may be a sign that they don’t see room for compromise on a core issue. 

If you suspect this may be the case, bring it up. You probably have a sense of where the disagreement lies, and it’s worth asking your partner straight up if this is giving them second thoughts about the business partnership.

If they won’t answer that question, you should talk to a lawyer – soon.

Refusing to Write Anything Down

Just as people generally seek to avoid conflict, they also try not to agree to anything they don’t intend to follow through on. 

If you’ve found your business partner taking unexpectedly long times to sign routine paperwork or simply refusing to do it, that’s a red flag.

It’s a giant waving red flag if that paperwork involves the business itself. If your partner is delaying, deflecting or refusing to enter into a written agreement acknowledging your percentage ownership interest in the business, a storm is brewing. 

Partnership agreements establish the rules of engagement, the basic framework for how the business is structured, how profits are distributed and who makes decisions. 

If no partnership agreement is signed, then the business will be governed by the statutory defaults in the state where it is located – and that may not be what either you or your partner want.

Irregularities in the Books

Have you noticed any sudden changes in the business’ financial metrics? Any new expenses that aren’t fully explained or contractors you aren’t familiar with? 

Your partner may be using the business bank account as their own pocketbook – and they could leave you on the hook.

Business partners share responsibility for safeguarding the business against losses and ensuring that the business complies with tax regulations. Failure to account for profits of the partnership or improper use of business assets for personal use is a red flag.

If you notice improprieties with the business books, due to a partner’s misuse of assets, unexplained losses, or potential embezzlement, immediate action should be taken to audit the books to identify the cause.

Prepping for Another Business

When a business owner has decided that things aren’t working out, they naturally start planning their next move – even before they have shared that with their partners. Look for the signs that this may be happening.

Is your partner buying up domain names? Looking into new equipment that your business doesn’t currently need? Making personal copies of customer lists, marketing information and price sheets? 

Unless stated otherwise, partners of a business have certain fiduciary responsibilities to the business, including refraining from self-dealing. If your business partner is taking calculated steps to setup a new competing business this is a major red flag.

The Bottom Line

My clients often say that it seems obvious in retrospect, but they never let themselves believe their business partner was making plans to move on until it was too late. 

You know your own situation best, but because you’ve probably never had a business dissolve before, you may be reluctant to trust your own gut. Or you may fear that by broaching the subject or getting legal advice on what to do, you will set the dissolution in motion.

That’s not the case. You and your partner will be better off with more transparency, and you will know how to protect yourself, your assets and your future business from a partner who may be undermining all three. 

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