KYP. What does it mean? No, not “keep you posted.” But stay posted: by the end of this article, we will explain what KYP means and how it’s a critical step in building your business the right way.
Know your professional hire – a familiar refrain. Before seeing a doctor or hiring an accountant, most people exercise some due diligence. In today’s world, due diligence tools are vast: a google search, checking out the relevant social media profiles or just asking around. Know your customer. In the wake of stricter anti money laundering legislation, banks have taken, i.e. been forced to accept, a more rigorous approach to learning about their customers. There are, however, a few areas in which professionals have failed to undertake even basic due diligence. One area, I wrote about recently, is with respect to investing. The second is in developing business partners. Customers seek to know their professionals. Financial institutions endeavor to know their customers. Why don’t professionals undertake basic due diligence regarding their business partners?
During my time as a state and city prosecutor, I saw this most often pose problems in the real estate sector. Real estate professionals often establish teams, or clusters, of trusted partners. The real estate agent or the real estate team is typically at the center of these clusters, as the agent or team forges relationships with most of the other key players: attorneys, financial professionals (mortgage brokers, lenders), title insurance companies and investors. These clusters work together in projects ranging from standard purchase/sale transactions to more complex transactions like short sales to investment projects (flips, conversions, rental projects, etc.) The more complex the transaction typically creates more opportunity for shared capital. And the more capital available for the professionals involved, the greater the potential for individuals to stretch the bounds of professional ethics and, in some cases, the law.
Professionals seeking to accomplish business goals develop laser focus on achieving that goal. There is nothing wrong with this focus (it’s one of the traits that makes these people business people). But this focus means a reliance on partners to 1) do his or her job 2) do his or her job ethically and 3) to do his or her job legally. Seeking out business partners typically means extreme reliance on point 1; after all a partner who will generate money for his colleagues is a valuable partner. Point 1 is also the easiest to establish – it correlates directly to someone’s apparent track record. What kind of house does the partner own? What kind of car does he or she drive? Figuring out whether someone has been superficially successful does not require much investigation. I call it “apparent” track record because income doesn’t necessarily paint the whole picture about the kind of businessperson someone is.
Points 2 and 3 require a deeper dive. These points require looking at past and existing business partnerships and deals. These points require a thorough analysis of the individuals involved in those deals. What kind of reputations do they have in their respective professional community? Have they been the subject of any regulatory, civil or criminal investigations? What were the outcomes of those investigations? If the investigation resulted in an action, what was the outcome of that action? What were the reasons for that outcome? This requires a bit more effort, but as an initial matter it means picking up the phone and making some calls. After all, before we hire someone, we check references. Why don’t we do the same with our prospective partners when thousands, if not millions, of dollars are at stake? The answer is not that such an inquiry is difficult, but uncomfortable. Asking about people, particularly people we will be doing business with, suggests mistrust. Rather than mistrust, I prefer the word “caution.” We can and should be cautious about the people that we will be bringing into our professional circle. The people we will be entrusting our colleagues and clients to. In fact, a failure to do so is, in my estimation, a breach of whatever duty we owe our clients.
People tend to fall into familiar patterns. If someone has acted unethically in the past, it is more likely he or she will do so in the future. If someone have run afoul of the law in the past, there is a greater risk that he or she will do so in the future. Professionals seeking to achieve their business goals may be so focused on those goals that they lose sight of the long-term risk of doing business with people they don’t know all that much about.
This is not to say that professionals who have acted badly or negligently in the past can’t serve as a suitable business partner. People are capable of learning and growing, and in some instances, of rehabilitation and reform. And previous or existing partnerships may have lacked the proper internal compliance procedures to best position professionals to act consistently with existing regulations and laws. So even if due diligence turns up red flags or warning signs, that does not necessarily spell the end of a prospective partnership. Rather, it allows the diligent professional to undertake an additional round of vetting by making sure that the past is not prologue. That past mistakes, whether unintentional or not, will not repeat themselves to the detriment of the group. This additional vetting might take the form of simply speaking to the prospective partner about the issue. Confronting concerns with prospective partners is not an uncomfortable encounter to be avoided, it is an exercise of due diligence that ought to be required.
A professional partnership that results in healthy financial returns is an ideal situation. A regulatory or criminal investigation can make the ideal situation a waking nightmare. For the well intentioned professional, such a nightmare can be avoided by learning about the people he or she is going into business with. KYP. Know your partner. A critical step in the pursuit of financial security without personal instability.