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Partnership Problems and Loss

Richard Rhodes, President, Rhodes Architectural Stone, Inc.

In the fairytale of entrepreneurship, your partners work as hard and as diligently as you. They watch your back as you build armies of skilled employees, take strategic market positions, and share the triumphs of vanquished competition and exceeded milestones.

During the early years of my partnership, I imagined my partner sharing important family moments—whether that meant beaming at each others children at graduation or leaning on each other in times of personal loss and need. It hardly mattered. My belief was I had formed a team to tackle the coming journey.

As a seasoned entrepreneur of fifteen years who had never had a business partner, I imagined the new venture as more of a brotherhood. We would combine our rolodexes, our life experiences, and be twice as prepared for any eventuality. We had different styles, of course, and very different strengths, which would bring differing and invaluable perspective to each new business problem. We were roughly the same age and both had new families with young children.

Although I didn't know him well, his family was well-known and respected, and his educational credentials were solid. Our fledgling company was growing in triple digits and cash was pouring in. By all appearances, we were well-positioned for a happy ending to the story.

Like any good "B" movie, after the build up just detailed, you know the train wreck is eminent. Yet as a participant, I never saw it coming. There was one moment a year into the venture when I took a cryptic e-mail, which had raised my suspicion, to my lawyer. Together we puzzled over it, until, with great feigned wisdom he responded, "if you can't trust your partners, who can you trust?" Who indeed? The opportunity to discover a big problem was missed and we pressed ahead.

When the problem was finally discovered, two and a half years after our founding, I was completely unprepared. The headlines of this story are gory and embarrassing; more than $1 million lost from the company, balance sheet inventory securing bank debt revealed to lack title (it had never been paid for), one-third of the company employees (mostly located overseas) involved in some way in this, as well as two of our three joint-venture factories.

We had outstanding contracts for personal residences of household names in the entertainment industry and suddenly had neither the cash, staff, nor production facilities to fulfill them. To make matters worse, consistent with our industry, we had taken 50 percent deposits on these multi-million dollar contracts and had spent the money to procure materials; the money was now gone.

As entrepreneurs, my wife and I have often remarked, "failure is not an option." The basket, the company, carries all our eggs—our cash, our investment, and our dreams. When someone or something threatens that basket, you dig deep, get creative, and quickly figure out how not to fail.

Those were dark days, and I look back in amazement that we were able to navigate our way through it. Five years later it is finally clear to me that we have survived. Time has taken the rawness off the betrayal and even given perspective to the tarnish of being associated with such events. It has also brought into sharp focus the many mistakes we made that prolonged the injury. I share them in the sincere hope you will never need them. This is not a club you want to join.

Partners

I am not against partners. I see my experience as an example of chaos theory. Some might call it simple bad luck. My former partner happened to be a minority partner in a position of trust. We found proof that the very first transactions my partner created were not above board and hard to catch since there was no change in cost of goods and no variation to arouse suspicion. More importantly, it demonstrated intent to do harm that is difficult to defend against.

Problems Begin

The biggest obstacle to putting the company back on course was ultimately my own emotion. The wound was so deep and unexpected that I alternately felt immobilized by grief and radioactive anger and thoughts of revenge. This was not productive. Every moment spent unengaged with the solution is a waste of vital recourses. Solve the issues hour by hour, day by day.

Forget grand strategies and planning, I had to buy time on contracts so I could rebuild the required infrastructure to fulfill them. That required laser-like focus of a constantly changing data set. Incidentally, the war room we set up was far more valuable than the $25,000 we paid to a "crisis consultant." The eight weeks I spent on the road in China, rebuilding my production and hiring and training new people, proved much more important than fruitless legal maneuvering.

Criminal Rule

One of the standard white-collar revenge fantasies involves sending the criminals to jail. In the real world you start with forensic accountants, certified legal translations of every document in a foreign language (these business transactions were in Chinese), and recover memory from servers and various hard drives.

Meanwhile, my now ex-partner had liquidated all his U.S. assets and moved them overseas and he contacted my customers and offered to finish their contracts for lower prices. With no sizeable assets to recover, huge legal bills burning limited capital and a disinterested judiciary, it became painfully obvious that I was unlikely to find satisfaction. Hundreds of thousands of dollars were spent with nothing to show for it at a time when cash and time were at their most critical stages. It was a huge mistake. My conclusion? Unless you can seize assets or make recoveries exceeding cost of litigation, move on as quickly as possible by focusing entirely on issues that repair or rebuild your company.

Living Well is the Best Revenge

Now, I view this episode as a very costly partner buyout. I have successfully transferred my anger into fuel for growing my company without him. I am determined to prove that the mandatory forfeiture of his stock as a result of his actions was his worst decision yet. Creating shareholder value has become a win for my family, my investors, and employees.

© 2007 Richard Rhodes. All rights reserved.

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