Unethical Business Partner. What Now?

The following is a business case I created for my students to understand real challenges of an unethical partner. What would you do if faced with the same situation?

When you started your business, you knew the risks of partnerships. 80% of partnerships fail, but you (along with 80% of partners) thought you could mitigate the risk of failure. Articles like, "Why Business Partnerships Are The Kiss of Death", provide ample warning.

But you never planned that you would be defrauded by your business partner... but that's exactly what happened.

When you started the business, your partner, who had very limited experience and education, agreed provide customer relations, sales development and promotional efforts. You would provide your networks and expertise in operations and supply chain to create a sustainable business model. You provided startup capital from your own pocket, while he asked his father for a matching investment. You both agreed to be paid in equal dividends from the profits of the business, with an intent to invest most of the profits back into the business initially.

Together you designed and developed a new product leveraging your expertise in manufacturing and your partner's understanding of customer preferences.

Initially the business was scoped to be a small, single store business. However the product was a hit and when through your networks, you were able to meet and close a deal with a large customer, the demand for your product drastically increased.

Sales grew significantly, and conservative financial and operational planning initially allowed the business to grow from cash flow. However when your partner complained of not making enough money, you agreed to pay him to manage the sales of the business, although you had never been paid a dividend or salary yourself. The agreement was that when the business did well enough to pay a dividend, you would be paid a double dividend until you both were made equal. This and the growth of the business required additional investment. You put in additional money and convinced a friend as well to invest. Your partner was unable to match the investment required.

The business continued to grow and do well. The supply chain you established provided a competitive advantage over the leaders in the industry and you began to take market share. However the business still lacked the cash to pay enough dividends to pay you and your partner (who was already drawing a salary), especially after the hiring of several new employees.

All of this growth put you at a cross-roads. To accomplish the agreed upon targets and goals of the business presented to you by your partner and the employees, and to keep current employees employed- additional investment was required. You decided it was worth the risk to invest because if only one of the eight agreed upon annual sales targets were accomplished by the sales force, you could pay back the loan and your investor. So you and your partner signed the docs to take out a joint-loan with mutual personal guaranty and a mutual responsibility to pay back the loan.

You then found out after the loan that your partner was spending a significant amount of time starting new businesses on the side and using your company's resources and customer base to promote personal interests. Having visited China once, he began to sell himself as a "China Sourcing Expert" to other businesses and leveraged company trips, resources, and time to promote his side businesses while still taking a full time salary.

You began to find expenses made by him associated with promotional activities and trips for your partner that did little to help your business. Your partner complained that his time was too valuable to do sales, so he hired a sales manager to report to him- adding additional cost. The sales force and new manager began to complain that your partner was distracted and not available for support when needed. One after another, the agreed upon sales goals were not met. Finally the last straw broke when your largest customer decided unexpectedly to change their payment terms and policies which overnight tied up significant accounts payable and significantly increased the cost of sales.

You ultimately had to shut down your physical operations, give the employees their last pay check and focused on finding a way to turn things around. Your partner complained that if he couldn't continue to get his salary, he would have to find work elsewhere.

Your partner shows up at the first meeting with the bank to try and work something out. The bank explains the mutual responsibility to pay back the loan. Your partner said he had no money to help but would make it up when he could. You and your wife agree to take out a home mortgage to pay down the loan with the agreement that your partner would make monthly contributions to help pay off his part of the debt. Your partner sold his home, closed all accounts and moved assets into his wife's name, and then proceeded to literally run out of town. Since then, you or the bank have not heard from him, despite numerous attempts via all communication channels.

He has now re-emerged online running several new businesses, including his "China Sourcing Expert" business. He is making a living selling business consultant capabilities claiming he has made his clients "six-figure incomes" (while ironically running his own businesses into the ground, eg THE ERA OF THE FAKE EXPERT). He claims openly he is an upstanding, and honest person and has probably convinced himself this is true. He has now purchased a new home in a new community.

Everyone familiar with the situation seems to have an opinion of what you should do:

His former neighbor: "He's a nice and honest guy. He would never do anything dishonest or unethical. This is just a bad business deal gone wrong!"

Investor: "He has a fiduciary responsibility to shareholders that he has misused and abandoned. This needs to be made right!"

Wife: "How can he look himself in the mirror after running away from this? We took out this loan to help him keep his job and take care of his family with a trust that he would keep his commitments. Why should he be able to run away and he and his family get a fresh new start while we lose our home?! You need to make him keep his promise!"

Brother: "That guy is a clown! Break his legs, so he'll think twice about doing it again!"

Lawyer: "There is intent and clear fraud here. Papers are drafted. Let's sue him!"

Friend: "Shame him publicly to protect others who might do business with him!"

Company: "Protect our image and reputation, solve this quietly!"

Your own flawed humanity: "Everyone deserves a second chance. He might still do the right thing!"

Your sanity: "Do nothing. Forget about this and move on!"

Now you need to decide what to do.

There are challenging trade-offs to each approach and there doesn't seem to be one right path. You were just contacted by someone asking for a business reference for this partner. You wish that those you asked for a reference from would have been more honest!

So here again is the central question I'd like you to consider:

Given the facts in this case, what approach would you take? (Please explain your rationale, justification, and how to mitigate any negative trade-offs.)

Look forward to your comments below!