Before You Sign the Deal: How to Read the People Running a Business

A practical guide for businessmen and investors who want to spot governance problems before they become expensive mistakes

By Vidhi Lalla 

Pune: Every business deal, partnership, or investment ultimately comes down to one thing: the people you are trusting with your money, your time, or your reputation. Products can be replicated. Markets shift. Prices correct. But a dishonest partner, a weak promoter, or a self-serving CEO causes a kind of damage that spreadsheets do not capture until it is far too late. The most successful business minds in the world have known this for decades. The challenge is learning to see what is not always obvious from the outside.

Warren Buffett spent sixty years building one of the most valuable companies on earth by starting every decision with a question that has nothing to do with valuation multiples or revenue projections. His question was simpler and more important than any of that: who is running this?

Why Character Beats Credentials Every Time

Most business meetings begin with numbers. Revenue, margins, growth trajectory, valuation. These are real and important. But Buffett’s view, repeated consistently across six decades of shareholder letters, is that numbers only tell you half the story. The other half is the person or team producing them.

In his model of corporate governance, managers are stewards of capital. The best managers think like owners in making business decisions. They have shareholder interests at heart. His test before entering any business relationship involved three qualities: integrity, intelligence, and energy. The order matters. A smart, energetic person without integrity does not become more useful. They become more dangerous, because they are faster and more creative at finding ways to serve their own interests at your expense.

Buffett’s analogy of the cockroach is worth keeping in mind: there is seldom just one cockroach in the kitchen. The presence of one visible problem within a company often hints at deeper, hidden issues. Apply this thinking to your own business partnerships and investments. When something small feels wrong, it usually is not the only thing.

What the Paper Trail Actually Tells You

There is a widely held belief that you cannot truly know someone until you have spent time with them face to face. That is partially true. But people also leave a trail of decisions, disclosures, and documented choices that reveal character far more reliably than any single conversation.

Buffett and his partner Charlie Munger have strong views on transparent accounting practices and understandable managerial explanations. They are sceptical of earnings projections and growth expectations that are not grounded in clear, honest reporting.

Before a businessman signs a partnership, acquires a company, or puts serious capital into a venture, there is a set of things worth examining closely. None of them require inside access. All of them are sitting in plain sight, in reports, filings, and financial statements.

Six Warning Signs Worth Knowing

These are not academic concepts. They are practical filters drawn from how experienced investors and business leaders think about governance, translated for anyone making a significant business decision.

Watch how debt is used against personal stakes. When a promoter or key partner borrows heavily against their own shareholding or equity in a business, it signals financial pressure that you might not be told about directly. High or rising personal leverage is a sign that the person running the business may have competing priorities. When things go wrong, lenders take precedence over partners.

Track whether the ownership pie keeps shrinking. In any partnership or company structure, monitor whether the number of shares or ownership units keeps increasing over time through repeated issuances, preferential deals, or warrants to the founding group at favourable prices. Every new unit issued to the promoter at a soft price is a direct cost to everyone else. Healthy, cash-generating businesses rarely need to keep going back for more. When they do, it is worth asking why.

Related party transactions deserve a second read. This is the area where money most quietly disappears in corporate structures. Transactions between a company and businesses owned by the founder’s family or associated entities are not automatically wrong. Many are routine and disclosed correctly. But large, vaguely explained payments to promoter-linked parties are a documented method of moving value out of a business without it appearing as outright fraud. The notes in any annual report or partnership agreement will list these transactions. They are worth reading carefully, particularly when the descriptions are vague.

Simple structures earn more trust than complex ones. Buffett has always preferred to operate as a collection of separately managed businesses where most decision-making occurs at the operating level. When a mid-sized company or business group needs forty subsidiaries, cross-holdings, and layered holding structures to operate, the question worth asking is why. Sometimes complexity is genuinely required. Often, it is a way to obscure where money actually moves. The harder a structure is to follow, the easier it is to hide things inside it.

Profit that does not produce cash is worth questioning. This is one of the most reliable signals in financial analysis. A business that consistently reports strong accounting profit but never seems to produce matching cash from its actual operations is either managing its books creatively or has fundamental problems with its business model. Over multiple years, genuine profit and operational cash flow should track each other reasonably closely. When they do not, the gap deserves an explanation, and that explanation should make sense.

Smaller signals that add up to a pattern. These carry less individual weight but deserve attention when they appear together. A founder drawing a salary that consumes a large portion of the business’s net earnings while claiming the business is growing well. An auditor who resigns without clear explanation or flags concerns in the accounts. Receivables that grow much faster than actual sales, which can mean revenue is being recorded before it is genuinely earned. A key partner whose personal stake in the business keeps decreasing quietly over time. Any one of these might have an innocent explanation. Several of them together, in the same business, rarely do.

The Annual Report as a Character Test

One of the most underused tools in any serious business evaluation is the annual report or equivalent disclosure document. Most people read it for the numbers. The more useful habit is to read it as a statement of how the management thinks about itself and its business.

Standards for measuring a CEO’s performance are often inadequate or easy to manipulate, and no one is senior to the CEO, so external discipline is limited. This means the tone and honesty of a management’s own communications become disproportionately important. A team that openly discusses a difficult year, a failed expansion, or a strategic decision that did not work out is telling you something true about how it operates. A team that describes a 40 percent drop in profit as a period of strategic realignment and consolidation is telling you something true as well.

Honest businesses describe their problems honestly. They do not need to dress them up, because they intend to fix them. Businesses where management cannot afford to be honest about problems usually cannot afford to fix them either.

Reputation Is the Asset That Cannot Be Rebuilt Quickly

During the Salomon Brothers scandal in 1991, Buffett stepped in as interim chairman and gave the firm’s employees a single standard to work from: losing money for the firm was something he could understand. Losing a shred of reputation for the firm was not something he would accept. He repeated a version of this to his own managers for over 25 years.

This is not idealism. It is practicality. Reputation, once seriously damaged in business, takes years to rebuild and sometimes never fully recovers. The partners, investors, and counterparties who rely on a business need to be able to trust it. When that trust breaks, the relationships built on it break too, and relationships are what produce deals, referrals, credit, and opportunities over the long run.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently,” Buffett said. This applies in both directions. It tells you what to protect in your own business. And it tells you what to look for when evaluating someone else’s.

How to Apply This Before the Next Deal

None of this is complicated to act on. Before entering a significant business relationship, acquiring a stake, or committing to a long-term partnership, run through the following:

Ask whether the person you are dealing with has ever publicly or privately acknowledged a business mistake. People who can own a mistake are capable of learning from one. People who cannot, tend to repeat them or blame others.

Look at how the financial structure is set up. Is it simple enough that you understand where money flows? If not, ask until you do. If the answer is unsatisfying, that is an answer.

Read the disclosures, not just the pitch deck. Related party transactions, auditor notes, and shareholding changes are available in formal filings for any serious business. They take time to read. They are worth it.

Notice whether the founders’ personal financial interests align with yours over the long term, or whether their structure gives them ways to benefit at your expense while the business looks healthy on paper.

And finally, ask yourself whether the person running this business, if they made a serious mistake that cost you money, would tell you about it or hide it. The honest answer to that question is often the most important number in the room.

Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Readers are advised to consult a qualified professional before making investment or business decisions.