Silent Partnerships: Fertile Ground For a Business Breakup
“Silent partnerships” are often a surefire recipes for business breakups. A silent partnership is one in which Partner A—the silent partner—provides funding for the business and is not involved at all in the day to day operations of the company. Partner B, on the other hand, runs the day to day operations of the company, maintains its books and records, and contributes little to no money to the business.
As the following client case study illustrates, the root of the problem is that an unsupervised partner may not behave well. Stated differently, do not leave the fox to guard the henhouse. While not every silent partnership has the potential to end in business divorce, there are simple steps that can decrease exposure to this risk.
Glenn discovered, quite accidentally, that his business partner Sandra was stealing from him and their company.
Glenn is an entrepreneur and co-owner of Filmazon, which owns one of the world’s largest and most prestigious collection of silent films. Glenn stumbled upon the collection and determined that it was a good investment opportunity. He formed Filmazon to purchase and market the collection. His intention was to license the collection in whole or in part or add to the collection and sell it. But Glenn had one problem: he knew nothing about silent films.
That is where Sandra came in. Sandra had an expertise in silent films and had connections in the industry. Glenn found Sandra through research and did not know her very well. Without much due diligence, he offered Sandra an ownership interest in the business in exchange for running the day-to-day operations of Filmazon. It was her job to find customers interested in licensing fillms, acquiring new films and finding someone interested in buying the collection. Sandra also handled the arrangements for temperature-controlled storage of the films. She also kept the books and records of the corporation and handled the company’s bank account.
While searching the internet for additional films to add to the collection, Glenn stumbled upon a valuable Rudolf Valentino film that Sandra had put up for auction. Upon further investigation, we learned that Sandra sold or licensed Filmazon films and pocketed hundreds of thousands of dollars. Sandra was supposed to use those funds to pay for company expenses. Instead, Sandra claimed that Filmazon was not making enough to cover expenses, and deceived Glenn into using over $1.5 million of his personal funds to pay expenses.
When confronted with this evidence, Sandra refused to produce Filmazon’s books and records and threatened to destroy them if Glenn commenced litigation.
Faced with the probability of further sale and theft of valuable pieces of Filmazon’s silent film collection, further pocketing of sales proceeds and royalities, threatened destruction of Filmazon’s books and records, and loss of the valuable collection inventory, Glenn was forced to file a lawsuit. At the end of a contentious litigation, the Court awarded Glenn a judgment for $2.6 million and ousted Sandra from Filmazon.
In retaliation to the lawsuit and in an effort to force a settlement in her favor, Sandra engaged in a campaign to defame, threaten and harass Glenn, his wife and their family. In particular, Sandra falsely told others that Glenn was an anti-Semite, a Nazi, a murderer, a bigot, a misogynist, a psychopath, a buffoon, a conman, a heinous human being, a monster, manipulative, deviant, dangerous, and evil; that he committed the crime of stalking her for four years, threatened the life of Sandra and her son, told her to commit suicide, that he referred to his nephew with Down’s syndrome as “retarded”, and that he made inappropriate remarks about Jewish people, Italians and African Americans. Glenn filed a separate lawsuit to put an end to Sandra’s outrageous conduct. The Court entered a permanent injunction muzzling Sandra’s free speech rights by preventing her from ever contacting Glenn, his wife and their family.
The story of Glenn and Sandra makes it clear that the silent partnership is a red flag for a business breakup. Glenn’s decision to have Sandra run the business without his oversight was compounded by his failure to adequately vet her character. The setup was also problematic because Sandra and Glenn lived three hours away by car, so Glenn was unable to meet frequently in person and monitor Sandra’s activities and the collection. Further exacerbating the situation was that Glenn granted Sandra unfettered access to the storage facility housing the silent film collection, allowing her to renew the contract with the facility and bar him from accessing the collection. It is never a good idea for s a silent partner to fund a business without knowing her partner, keeping tabs on the finances and activities of the business, and maintaining at least shared control over significant business assets. As Ronald Reagan said, borrowing a proverb he learned from the Soviets, “Trust, but verify.”
Rocco Luisi, Esq. is a Speaker, #1 Bestselling Author and Law Firm Partner. After working in the trenches with business owners to prevent, mediate and litigate internal business disputes for more than two decades, Rocco has seen first-hand why financially sound companies nevertheless fail. Out of these deep experiences, Rocco has learned what it takes to make businesses last. Rocco speaks nationally about this important topic and his unique law practice is focused on helping his clients achieve business longevity. You can reach him at email@example.com