A Partner Knows All the Secrets: Side Businesses, Kickbacks, and Credit Card Points

A partner isn't an employee. He knows the margins, the customer list, the vendor prices, the weak spots, and the plans. He sits inside the business's bloodstream. That is what makes a partner valuable—and it is what makes this chapter necessary. What may a partner do, outside the partnership, for his own private benefit?

I want to be careful with the framing because this chapter isn't about suspicion. Most partners who wander into these conflicts aren't scheming—they drift in, one reasonable-sounding step at a time, without ever asking the question out loud. The job of the agreement is to ask it out loud, once, at the beginning, regarding every doorway. Let me walk you through the doorways—nearly every one featuring a story of someone who walked through it unexamined.

Doorway one: selling to your own partnership

May a partner run a business that earns money by providing services or goods that the partnership needs? If the partnership needs shipping, may a partner own the trucking company it pays for that shipping?

Note carefully: this isn't competition—he is not stealing customers; he is selling to his own business. It sounds almost helpful. Here is what it looks like when it goes unexamined.

Reuven started a magazine and took Shimon in as a money partner. Shimon, unknown to Reuven, also had a stake in a printing company with Levi. Shimon suggested—helpfully!—that the magazine use Levi's printing business. And so it went, for a long time, until Reuven discovered that his partner was a part-owner of the printer. From there, everything went downhill. Reuven's claim: we could have been paying far less all along—but you never negotiated because you were a partner on the other side.

Sit with the structure. Every dollar the magazine overpaid for printing was a loss Reuven shared but Shimon partly recouped from the other side. Whether the prices were actually inflated almost doesn't matter—once discovered, nothing can be trusted retroactively, and every invoice becomes an accusation. The workable arrangements are: yes, but with disclosure and market pricing (the partner must tell the others, and the prices must be at market rates or better); or written permission first, on a case-by-case basis. Notice what both have in common: the arrangement is legitimate only when it is visible. It was the secrecy, not the printing, that destroyed the magazine partnership.

Doorway two: same customers, different product

May a partner open a business that targets the same customers or vendors as the partnership? Again, for precision: this isn't running a competing business (that is addressed below). It is selling different products to the same people.

The story: Reuven and Shimon are partners in a roofing business. Shimon also has a stake in a framing company. Reuven knows about it—no secrecy this time. And yet Reuven finds himself wondering, constantly: when Shimon quotes a roofing job, is he giving our best price? Or is he keeping the roofing bid soft because he wants the framing contract too—where he keeps more of the profit?

Notice: this story has no proven wrongdoing at all. Maybe Shimon's conduct was flawless. The damage is the question—permanent, unanswerable, and corroding every joint decision. Reuven can never again watch a bid without wondering. The point of settling this doorway in advance isn't to catch a thief; it's to make the corrosive question impossible—either "yes, and he may use the customer and vendor lists" (eyes open, agreed), or "not customers, not vendors, without written permission." Either answer beats the eternal "maybe."

Doorway three: kickbacks—and the $60,000 question of credit card points

May a partner buy goods for the business from a vendor where he personally receives a benefit for every purchase? Straightforwardly: is a partner entitled to receive a kickback in any form? The honest answers mirror doorway one: disclosure plus market-or-better pricing, written permission, or a defined "it-depends" clause. The principle is identical: a partner directing partnership spending toward his private benefit is either doing it in the open, under agreed terms, or he shouldn't be doing it at all.

But hiding inside this question is a modern cousin that sounds like a joke until you hear the numbers: who owns the credit card points? Points, miles, and cash back on business cards. Someone told me recently that his business earns over $60,000 a year from points alone. In a large business, this is not a rounding error; it is a mid-level salary, arriving silently and attached to nobody's ledger line.

The ownership question is real because there is logic on each side. The points came from partnership money—so should they belong to the partnership and be split like profits? Or, since the card is in one partner's name, with his credit backing it and his liability to the bank if things break, should the perks be his? The clean options are: everything belongs to the partnership, divided like profits; everything belongs to the cardholder who carries the liability; or a split that maps each benefit to its nature—points and miles (personal-use currency, which is awkward to divide) go to the cardholder, while cash back (which is simply money) goes to the business. Any of the three works. What does not work is the default in nearly every partnership in the world: one partner quietly accumulating a five-figure benefit that the other has never once thought about—until the day he does, and then it is ten years retroactive, unrecorded, and undividable.

Doorway four: actual competition—during the partnership

Now the classic: may a partner open a competing business of his own while he is still in the partnership?

The options range from open to closed: yes (with the sub-question: may he approach the partnership's existing customers?); yes, but only in a defined territory (allowed there, not here—with the same customer sub-question); no, without written permission; and one creative middle path I'm fond of: he may—but if he wants or needs a partner for the new venture, he must first offer it to his existing partners (first rights). If a partner joins, the new venture runs under the same rules as this partnership. That option converts a threat into a growth engine: the ambitious partner gets his outlet, the partnership gets first claim on the opportunity, and nobody has to sneak around.

Doorway five: competition—after the buyout

Same question, different moment: may a bought-out partner open a competing business? Options include: yes; territory-limited; or not without written permission for a defined period—commonly five years, sometimes two.

There are two things to understand here. First, this must be decided before it is needed, because at the time of a buyout, interests are perfectly opposed and the leverage is grotesque—the leaving partner wants his freedom, while the staying partner is paying real money for what the business is worth. This leads to the second point, which I always put to the buying partner: be clear with yourself about whether you are actually paying for something of value. If your agreement lets the departing partner open a replica of the business across the street on Monday—utilizing the relationships and knowledge he accumulated on the inside—then what exactly did you buy? The buyout price and the post-buyout non-compete are one deal wearing two clauses. If you price one without the other, you may find you've bought a customer list that your seller kept a copy of.

One structural note: the during answer and the after answer should make sense together. Being strict during the partnership and looser after is coherent; the closer a partner is to the secrets, the tighter the restraint should be. Being looser during and stricter after is backward. Check your two answers against each other before signing.

The common thread: sunlight, agreed in advance

Look back across the five doorways and one principle covers them all: almost everything here is permissible with disclosure and agreement—and poisonous when discovered. The printing arrangement could have been fine if disclosed on day one at market prices. The framing company could have been a non-issue with clear terms regarding bids and customers. The points could belong to either party—happily—once the sentence is written. In every story, the wound was not the arrangement itself; it was the discovery: the moment a partner learns that something was flowing sideways and instantly re-reads years of history in that light.

So, the real function of this chapter isn't restriction—plenty of these answers are "yes." It is to ensure that every sideways flow of benefit is named, agreed upon, and out in the open before it starts. A partner who knows all the secrets is a fact of partnership life. A partner who knows all the secrets and has agreed, in writing, on what he may do with them—that is a partner you can stop watching. Which is, in the end, the whole point of a partnership: to have someone at your side whom you don't have to watch.