business advice | Sep 7, 2021 |
My former partner’s bad financial behavior is putting my firm at risk. How do I escape this toxic relationship?

Dear Sean,

My former business partner had a bankruptcy on her record when we formed our original S corporation. Since my credit was impeccable, I was the primary cardholder on all of our credit cards. After we dissolved our business, I generously (hindsight: foolishly) allowed her to use our company card for her new solo business with the understanding that she would pay it off in full. She did not.

She is mentally unwell and filled with vitriol, and stopped paying her minimum on a $30,000 balance months ago. I have since spent $10,000 in legal fees with no resolution or payment on her part. I only hired counsel after nine months of her refusing to reply to any of my emails asking for a payment schedule, or even a phone call to discuss the balance. Her lawyer, who has since gone radio silent, told mine that she does not want to transfer the balance to her own credit card because she does not want to carry any debt. Mind blown.

She has also refused to sign my lawyer’s agreement with a 12-month payment plan. Do I have any recourse? Am I resigned to filing with the California small claims court for the $5,000 I have had to make in payments to avoid all my other business and personal cards being suspended?

Disappointed by a Delinquent

Hi, Disappointed.

While I am a lawyer, I will leave it to your lawyer to discuss your detailed legal options with you. What I can say is that you knowingly allowed her to use your credit to start her own business without any formal agreement in place and are now in a very tough spot with regard to your credit and the viability of your firm. Whether you are ultimately able to recover the money she owes you is most certainly in question.

The larger question is how and why you got here in the first place. From the outside, you appear to have a great firm with a viable business. So I am immensely curious as to why you would bring on a partner as “messy” as she is, and then, after dissolving your partnership, allow an ongoing (and clearly dangerous) relationship.

Regardless of legal form, I believe partnerships require three things: (1) “skin” in the game for all, and if someone’s skin is sweat equity, it is defined and earned; (2) clearly defined roles with little to no overlap; and (3) an easy (though not necessarily pain-free) way to dissolve things, with no ongoing relationship beyond the dissolution.

If you cannot recognize your partner’s superpower that you do not possess—and it is a superpower your firm needs—there is no need for the partnership. Find an employee (or employees) to fill that role instead. The entire point of a partnership is for one plus one to equal three. (That brings me to the topic of employees becoming partners: In my book, employees are not allowed to have sweat equity as part of their investment. They need to write a check, as the risk of loss has to be real, at least beyond a lower salary.)

When I look at your situation, I am positive that the first and third requirements were not met, and I suspect that, if pushed, you would agree that the second one was not met either. The result is a very bad breakup, as you are currently experiencing. However, the lesson is not to avoid another partnership altogether—it is to understand the reasoning behind any future partnership and what you each hope to gain from the new relationship.

By all means, listen to the advice of your lawyer about how you might recover your funds from your ex-partner and save your credit. Then move on. The longer you stay tied to her, the longer you do not understand your role in this situation and what you can learn from it.

Last, the biggest mistake I see with partnerships is believing the other will be the savior, or the answer to your firm’s issues. In other words, each partner is overinvested in the power of the other to drive the firm. No, no and no. Partnerships are about allowing each to do what the other loves and then bringing that value to the collective—no more, no less. In that light, each will find their lane, and you will all reap the rewards. Any other dynamic will be the proverbial crack in the windshield that will shatter eventually. The way to go is with equal voices, distinct in the effort, both with everything to gain and lose.

Forgive yourself for the bad decision you made yesterday, and then allow yourself the freedom to make better ones tomorrow. It is clear you want to right a wrong, but driving is awfully hard when you are obsessed with the rearview mirror. Vindication will be tomorrow’s success. Let that be enough.

Homepage photo: ©Freshidea/Adobe Stock

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Sean Low is the the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

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