Five warning signs your business partner is a red flag
Starting a business with the wrong partner or shareholder can be more damaging than going it alone. Business shareholder and partnership disputes are among the most costly and emotionally draining legal battles, often significantly damaging both company and personal relationships.
When warning signs appear early in a company between shareholders, or those in a partnership, it’s common for business owners to ignore them in the hope that things will improve. But according to Alex Cook, a commercial litigation solicitor at Helix Law, a specialist litigation firm based in the South of England, these red flags rarely disappear on their own.
Many business owners and shareholders come to us quite long after the initial damage is done. Complexity and financial impact might have been avoided if they’d recognised the warning signs and taken action early. It’s quicker and cheaper to resolve disputes earlier.
Five red flags that spell trouble for your business partnership
Tp help you, Cook reveals the five most dangerous warning signs that suggest your business partner could be heading for trouble, and what you should do about them.
1) They’re secretive about money and lack transparency
The biggest red flag is a shareholder, director or partner who doesn’t want to share information and discuss finances openly. This includes refusing to share bank statements, transaction details, being vague about contracts; connections between people, assets, liabilities, income and expenses or dodging questions about what they’re doing, future plans or money.
Transparency, especially around money, is the foundation of any successful business relationship. We often see that when someone has been evasive about money, there is often something they don’t want you to know.
This secrecy often escalates into major problems when cash flow issues arise or when one partner discovers undisclosed liabilities or expenses. In worst-case scenarios, hidden financial problems can leave the business liable for debts you never knew existed, and shares worth considerably less than they were or ought to be.
Shareholders, even minority shareholders, have considerable recourse if another shareholder or director has ‘gone rogue. It’s a common misconception that a shareholder with more than 50% can do what they want. It’s not true, and shareholders of any size must not be treated unfairly or prejudicially by other shareholders. If they are, there’s lots of legal remedies available.
2) They won’t sign proper agreements
Contracts can feel like an unnecessary or serious step, especially for startup businesses, but they bring certainty and can force thinking about what should happen if unforeseen events occur in the future.
It’s not unusual for shareholder agreements to include clauses relating to divorce; bankruptcy; death; and covering items such as what happens if one wants to sell and the others don’t; and who should have control. Anyone resisting formalising the relationship through legal agreements is sending a clear warning signal. Whether it’s a partnership agreement, shareholder agreement, or simple contracts, reluctance to put things in writing suggests they want to keep their options open.
Contracts take time and incur cost to get right which can be frustrating, but they act as a safety net against unforeseen events. It can be useful to have to think about risks before they ever happen- and often when they never do. Someone who says ‘we don’t need contracts, we trust each other’ can often be inexperienced in business or litigation, or both.
Without proper agreement, disputes over ownership, responsibilities, profit-sharing and everything else become harder, more time consuming, and expensive to resolve later. Absent legal contracts we have to try to go back in time to work out what was agreed. That can be complex and of course is probably not agreed by everyone. This can lead into the court battles we regularly deal with.
3) Their communication is all over the place
Inconsistent communication patterns are a more subtle warning sign. This includes shareholders, directors and partners who disappear without explanation, change their story frequently, or give different versions of events to different people.
Successful business relationships aren’t so dissimilar to successful marriages. They require and benefit from good, clear, constant communication between the people involved. When someone can’t maintain consistent contact or keeps changing their version of events, perhaps acts hot and cold, hoards information or keeps tight control, it can often signal they’re juggling competing interests and are no longer focussed on benefits for the whole team as opposed to their own personal interests.
Poor communication usually indicates deeper issues like a lack of commitment or competing business interests that haven’t been disclosed. Silence rarely means nothing is happening. Usually it means things are happening, or have happened, that the other side doesn’t want you to know abou.
4) They have a history of failed partnerships
While everyone deserves a second chance, a pattern of failed business relationships should raise serious questions. This is particularly concerning if they blame every previous commercial partner for the failures without taking any responsibility.
One failed partnership business or investment might be bad luck. Multiple failures might suggest a pattern of behaviour where the focus and energy is all on faking it rather than making it. We’ve dealt with many disputes where the business is actually geared around creating the impression and veneer of success, but it’s actually an advance fee scam rather than a loan, or where the promises of company growth to encourage investment and shares are hot air.
He continues: Have a critical mind and don’t get swept along. Ask detailed questions about what went wrong and listen carefully to their answers. Sharing battle scars with transparency can really help develop rapport, trust and confidence, so this needn’t be a negative. However, if there’s a lack of transparency, that might be a warning signal.
Research the business history of those you’re contemplating dealing with thoroughly and speak to previous investors and connections if possible. Their track record is often the best predictor of future behaviour.
Due diligence can mean different things to different people. But keep in mind that it’s no use asking people or making enquiries of those in the same circles, or who have been introduced by your contemplated joint shareholder, Director or business partner. They’ve been suggested to you for a reason. Check Companies House, and land registry data. Pressure test what’s said and check as much as possible stacks up.
5) They promise the world but deliver nothing
Partners who consistently overpromise and underdeliver are setting your business up for failure. This includes making unrealistic commitments to clients, promising resources they don’t have, or guaranteeing outcomes they can’t control.
Overpromising can be a sign of desperation or dishonesty. Either they don’t understand the business well enough to make realistic commitments, or they’re deliberately misleading you about what they can achieve.
This behaviour typically escalates as the business grows, leading to disappointed clients, damaged reputation, and potential legal action from customers who feel misled.
Trust your instant and act on it
The cost of ignoring red flags goes far beyond money, though the financial impact can be devastating. I’ve represented business owners where we’re having to pursue recovery of millions of pounds of assets from a rogue Director/Shareholder who has transferred them to a company owned by his mother, all engineered by him without our client knowing.
In another dispute, a rogue conspired with others to deprive our client, a minority shareholder, of tens of millions of pounds. These are people who have been misled and left carrying significant liabilities and having to contemplate litigation, all because they didn’t act on early warning signs.
The good news is that if we get involved early enough, we can often make a significant difference. Many partnership and shareholder-related problems are resolvable either by agreement or by swift and often precise but aggressive steps to improve our/your position. There are significant legal protections available even to minority shareholders or junior partners.
If you spot these warning signs early, you will have options, and we can locate and often prevent dissipation of assets. Trusting your instinct is key. If something doesn’t feel right, get some advice from a litigation specialist. Trust that instinct and spider sense and act on it so you know where you stand and can protect and improve your position.
Helix Law is a specialist litigation firm of solicitors based in the South of England, acting nationally. They specialise in complex commercial, property and construction litigation and dispute resolution. They’re known for litigating against City firms and have grown to become one of the largest specialist litigation teams in the South East. They handle cases ranging from shareholder disputes to property litigation and construction adjudications.
