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Ineffective Business with Partners: Reasons and Solutions
Partnership is a profitable form of financial and management cooperation. However, the risk exists of being involved in ineffective business decisions taken by partners. The most vulnerable are those business owners who are not actively involved in a company’s activities.
There are two big reasons why a business may work ineffectively and without profit. They are the following:
The first reason is the bad faith of partners who are involved in company management. Fraudulent activity without notifying the investor is able to significantly damage a company’s market power and financial status.
The second reason is other internal and external negative impact on a company. For example, a company’s financial and management problems, which are the reasons for no profit.
Many instruments can help a company to overcome a critical state. However, it is a huge challenge to define the real reason for a crisis within a company.
In both cases, of a fraudulent partner’s activity and other business-related difficulties, it is necessary to collect information about company activity and the activities of its business partners. Such information can be received from internal and external sources.
These are the following stages of preliminary screening, when all information is collected from external sources:
- Verification of all associated entities. This may include physical and legal entities’ relationships, among which may influence the results of each other’s activity and the activity of their representatives. Such verification helps to understand whether or not the created companies aim to decline the indicators of the main company without the investor’s knowledge. Verification also helps to understand whether there are any transfers of the main company’s funds to personal accounts.
- Inspection of state-managed real estate registries. Such inspection is reasonable when the company has real estate in its assets. It also helps to understand the current status of such assets and if one of the partners tried to transfer real estate into other ownership or use it illegally without the investor’s knowledge.
- If the company has had court disputes with a state authority, its inspections help to receive information about the revealed company’s activity. The investor can receive information about the number of employees, money turnover, existence of company debts, details of money flows, etc. at this stage.
After information is received from external sources, it is necessary to hold a deeper inspection based on the company’s internal information. The beneficiary owner of more than 10% of a company has the right to request data on company activity in full. The owner needs to specify the details of the request as much as possible and to include the most detailed and complete list of documents in such a request. All information received from external sources can help to detect the documents which reveal useful company information. Otherwise, it could be hard to understand what information needs to be examined.
Solutions to Crisis in a Company
The most likely reason for a company’s low productivity is within internal or external risks the company has encountered if requested documents and information received from external and internal screening on the due date provide reasons to trust such information.
If a company is, in actual fact, indeed in a crisis and the investor’s activities can help to solve it, he/she should alter the role of a passive participant by taking a more proactive position in corporate governance.
The beneficial owner who wants to take control of a situation can use the following management tools:
– The General Meeting. This is a meeting of participants who manage the company. During the meeting the investor may submit specific cases to discuss anti-crisis measures.
– Establishment of a Supervisory Board. It can include both the investor and any person whose actions he/she trusts. The main purpose of the Supervisory Board is to monitor the actions of the company’s director. Also, the Supervisory Board may consist of a team of experts (more experienced managers) who can strengthen the company’s position and lead it out of crisis.
– Consolidation of global business development strategies into a corporate agreement. This document sets out the rights and obligations of each of the partners regarding the company’s activities, as well as its tasks and KPI — numeric indicators of activities that help to increase effectiveness indicators. Such a document enables a global strategy to be raised, to be flexible regarding current plans, and to avoid unnecessary distrust caused by the changed position of an investor in the business.
The suggested tools allow the beneficial ow-ner to take up more active participation in the company’s processes and optimize the company’s ecosystem.
How do you Deal with Dishonest Partners?
If you, as an investor, request information about the company’s activities from partners, and they delay the response, provide an incomplete set of documents or you’ve received information that does not match the data collected from external sources, you may well have encountered dishonesty from your partners. Artificially raised accounts payable, illegal transactions on property alienation and other similar facts are additional indicators of fraud.
If an investor understands that his/her partners “are cheating him out of money”, first, then he/she is advised to freeze the assets (arrest them). This action allows you to secure assets, preventing withdrawal of potential assets from the business, which is possible in the near future. The arrest of assets can be organized via a court.
After the assets are secured, the company’s beneficial owner needs to decide whether to leave the company or remain in it. In most cases, the investor cannot optimize company management without access to operational activities. In this case, it is more appropriate to leave the business.
The calculation of the value of the investor’s share takes place from the moment the beneficial owner applies to leave the partnership (the price of the share directly depends on the company’s balance of assets). Then, the company has 30 days to calculate the value of this share. The investor may agree or disagree with the calculated price (if the investor disagrees, he/she applies to a court to decide regarding the price of a share). After a share price is established, the company has 1 year to pay the set money to the investor. If the company does not pay the share price to the investor in the course of one year, the investor has the right to apply to a court on collecting the value of his shares in the form of assets or cash.
Ineffective business is a problem that can be solved in two ways. If information about a company’s activities is hidden from the investor, it will be more appropriate for him to withdraw his share and leave.
If the partners act in good faith towards the investor, but their measures to overcome the crisis are ineffective, the investor may help the business to survive difficult times by being more actively involved in managing the company.