Can You Trust Your Partner? - Part One

In a previous posting, I talked about protecting your business from outsiders and employees. But what about other owners of your business - your partners? Can you trust your partners?

I am sorry to tell you that over the years, I have seen more than my share of embezzlement from partners in businesses. My guess is that none of the partners enter the business relationship with the intention of stealing from their partner. They all enter with the idea that business will be great and they will all make a great deal of money. The embezzlement usually comes about because of one of three reasons.

Reason One: Business is not good. The partners are not taking home enough money to pay their bills. Thus, one partner decides to take more than his share.

Reason Two: Business is fantastic so one partner becomes greedy. She decides that since there is plenty of cash, the money will never be missed.

Reason Three: Business could be good or bad. One partner feels that he is doing way more than his share of the work. Maybe he is "Mr. Inside" and handles all of the administrative duties and his partner is "Mr. Outside" and handles all of the sales. He sees his partner taking customers to dinner and to play golf while he "is stuck in the office doing all of the work." He therefore decides that by embezzling he is "getting his fair share for all of the extra work he is doing."

No doubt there are other excuses that partners use to justify their actions. These are the most common. Of course, none are legal or ethical.

What can you do to protect yourself? First of all, if you don't know how to read and understand financial statements, LEARN IMMEDIATELY. It is a vital part of running a successful business. Take a class, pay a CPA to teach you. It doesn't matter how, just learn to read and understand. You need to be able to know what makes sense on a financial statement and what doesn't. You need to be able to look for signs of trouble. This is your best protection.

Secondly, you should have an agreement with you partner(s) that you will review all financial statements together so you all can ask questions of each other. I always recommend to any company with multiple owners that they generate monthly financial statements.

Third, ask financial questions frequently. Let the partner who handles the accounting or bookkeeping function know that you are interested in the financial details of the company, not just the bottom line. If your partner is embezzling, he can certainly make the bottom line look good no matter what the real situation is.

Fourth, you should have an agreement that any partner can request an independent audit of the financial statements at any time. Just knowing that this option exists can be a good preventive measure.

Finally, have an agreement that the financial statements MUST be audited periodically. The length of time between required audits may have to be determined by the size of your business and the cost of the audit.

I will write more on this subject in the next posting. Please feel free to post your comments.