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Why You Should Background Check Your Business Partner

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If you don't perform a background check on your potential partner before doing business with him, you're setting yourself up to get duped.

Now, don't get me wrong: Most people don't lie on their résumés. But those who have something to hide will hide it. In other words, you won't know it's there unless you look for it yourself.

It's imperative to perform a due diligence check before entering into any business relationship -- especially for an entrepreneur. Doing a background check on a potential partner or co-founder, while unorthodox, could bring to light small issues that could be resolved with a bit of honest dialogue. However, it can also reveal larger issues that should never be ignored.

Leveraging Your Risks.

Starting a new business inherently comes with risks that must be mitigated. Just like launching a new product, hiring a partner requires protecting your business against potential risk and failure.

In the past few years, big names, including Yahoo! chief executive Scott Thompson, RadioShack official David Edmondson, and Etsy founder Rob Kalin have all been brought down from high towers because of résumé fraud.

Research shows they're not alone. Background checks of potential employees routinely show both minor and more concerning issues for employers. For example, according to ADP's 2009 hiring index, 46 percent of résumés reviewed showed discrepancies. Meanwhile, search firm CTPartners found 64 percent of candidates overstated their accomplishments, and according to tech professional association publication IEEE Spectrum, 71 percent lied about how many years they had held a position.

Even more surprising, a study by auditing firm KPMG found top-level managers are responsible for 53 percent of workplace fraud.

When it comes to starting a business, it's your responsibility to be sure your partner is a person you consider to be honest, trustworthy, and straightforward about his accomplishments.

Knowing What to Look For.

Most background checks will come back with some sort of red flag. Don't panic. Here are the issues that merit concern:

Financial Issues: Bankruptcy, tax liens, poor credit, and other financial problems should raise a red flag, even if your potential partner will not be contributing financially to your business. Someone in a financial crisis may have grossly mismanaged his personal or business finances and may lack the skills or discipline to be successful. Worst-case scenario: he may look for ways to steal from your business to solve his personal problems.

Ethical Issues: Bad press, pending litigation, or possible ethical problems may signal your potential partner is not trustworthy. Furthermore, anyone who misrepresents his academic history, references, or employment information on his résumé immediately demonstrates a lack of honesty. Look for a candidate who values integrity and practices good personal and business ethics. An unethical business partner may steal ideas or clients from your company or involve your business in legal troubles.

Personal Issues: Serious personal challenges or problems may keep your potential partner from committing fully to your startup. Running a business takes focus, time, and energy. If your partner is dealing with one personal crisis after another, you may find yourself carrying the weight of the responsibility on your own.

However, not all red flags are reasons to eliminate a candidate. Here are a few red flags that may arise that don't necessarily disqualify an applicant:

Minor Legal Infractions: A speeding ticket or traffic violation is not a valid reason to eliminate a candidate.

Academic Records and Performance: Don't worry too much about your potential partner's academic performance unless there's an academic requirement for your business venture, such as working as a doctor, lawyer, or architect. Some of the most successful entrepreneurs are college dropouts.

When it comes to starting a business, nothing is more important than picking the right people to work with. What may seem like an invasion of privacy could be what ultimately protects you and your startup from ruin.

This blogger graduated from Goldman Sachs' 10,000 Small Businesses program. Goldman Sachs is a partner of the What Is Working: Small Businesses section.