04/27/2011 11:16 am ET Updated Jun 27, 2011

Cash And Control: An Expensive Business Lesson

The lessons I learned from my first startup company are ones I never forgot.

The first two years of my first business, developing, producing and selling sportswear clothing, was challenging and exhilarating. The business grew quickly because I apparently designed a product that appealed to a wide range of female tennis players.

In the third year, I took on a fifty-fifty partner when he invested $500,000 in the company and everything changed.

Carl and I had gone to high school together, but I barely knew him. Tracking me down at a sports trade show, he showed me his company's tennis dresses and said he was tired of working as the V.P. of Sales for a large conglomerate and was ready to make a move. Making him a partner seemed like a good idea at the time.

When he insisted that he be named president of the company, I should have surmised that he would be a real pain to deal with, but a half-million-dollar investment was nothing to sneeze at. I thought I could control him because I was the CEO and chairman of the board and had the exclusive right to hire and fire. I was right about him being a real pain, but wrong about being able to control his actions.

During the first six months we were together, I had just finished an innovative new line called "the sherbets," so named because the dresses were trimmed in lemon, lime, orange, or raspberry terry cloth.

"This is the greatest tennis line I have ever handled," said Carl.

"Carl, remember, we only have a million-dollar line of credit to buy material and pay for manufacturing our dresses, so don't go crazy selling everyone," I warned him sternly.

"I'm president and I'll do what I want. What do you know?" Carl shouted back, sarcasm dripping from every word.

When orders started pouring in from all over the country, I called Carl every day, saying, "Stop selling . . . come off the road."

But he continued to sell the line for several more months, taking orders for millions of dollars worth of dresses that our cash flow could not cover. After nine months, I knew there was only one way I could get him off the road and away from potential customers. I called Carl and resolutely exclaimed, "You're fired!"

Unfortunately, we ended up in a lawsuit. I was stuck with the bank loans (because I had failed to get him to sign on personally) and the inventory (hundreds of tennis dresses hanging in my garage). The only way to resolve the stalemate was to dissolve the company. A disastrous result!

For the next two years, I spent six days a week collecting the company's receivables and selling off the inventory so that I could pay down the bank debt. That left me with nothing monetarily to show for all that effort and success. But by keeping a positive outlook at least I salvaged my reputation with the bankers and could borrow again another day.

I learned the hard way that you never know the skills and personality of others until you "partner with them." That's when all the warts come out -- in business and in matrimony -- and then it's too late. My education was expensive; loss of a solid startup company and more than a million dollars of debt to repay.

My advice: Never enter into a partnership which you don't control and understand all of the "what if's" of cash flow before you start your company.

Starting a business from scratch is a challenge that tests your discipline, fortitude, and persistence -- but it is the only way I know to prove that you can create something from nothing and be successful. I proved that with my second startup -- I hope you will succeed on your first try.