When A Friend Becomes a Business Partner: Smart Move, or Bad Idea?

Ed Anderson
Aug 31, 2018 · 4 min read

It makes sense to want to go into business with someone you know and already trust, but what happens if that person is a friend? It can be difficult to go into business with family members and friends if you’re not clear about the advantages and disadvantages of doing so well in advance.

There are situations in which a friend as a business partner can make a lot of sense, but you need to consider the pros and cons of all these options before moving forward with such a relationship.

According to a project recently completed by MassMutual Financial Group, 518 family-owned businesses identified that the most successful companies were the ones that had the responsibilities and roles of people outlined upfront. This can be vital as you add a friend as a business partner, too. Here are some things to consider as you think about developing a business with a friend.

Decide on Business Structure and Splitting Losses and Profits at The Outset

As with any company, you will need to be focused on the details. The truth is that the devil is in the details and this is never more true than when developing a partnership with a friend. Far too many friendships and companies have fallen apart because of failure to focus on the details.

You will need to consider the structure of the company and how the losses and profits will be split, not only now, but in the future. Having a business lawyer review all of this is extremely important. It might seem silly to set up paperwork because you trust your friend and you assume that there will not be any problems, but it is always a good idea to have this articulated in writing.

Legal contracts will outline the type of partnership arrangement you have and this should be reviewed specifically by an attorney.

Having the Same Vision and Goals

One way in which having a friend as a business partner can work is if you have the same goals and vision. This still means that you can benefit from having a contract in place that articulates the roles and responsibilities of each individual person, as well as what will happen in the event you decide to close the business, or to have one of you exit the business.

It might have initially appeared as though there was a mutual vision between you and your friend, but you later discover that this is not the case as you are developing the business plan or the legal contracts. It is beneficial to know this information upfront, rather than relying on your compatibility as friends. Having a conversation about values and goals ensures that you both are on the same page.

Outlining an Exit Strategy

At the foundation of your business, it might seem unnecessary to think all the way into the future to when you’re closing the company. However, you must have a plan. It might not be your individual decision to dissolve the business, but your partner may need to suddenly exit due to disability, divorce or any number of other concerns. As you put together your start-up documents after discussing the structure of the company, you need to put your exit strategy in writing.

You will certainly be sympathetic if a life-changing event occurs, or if the friend suddenly has a change of heart and no longer wishes to participate. However, what happens to the profit and loss split if this occurs? How will business ownership be transferred if someone suddenly wishes to exit? These details need to be outlined early on.

Consider General Stability

It can be dangerous to engage in a business partnership relationship with a friend, if he or she is coming to you out of desperation.

A friend, for example, who needs to restart their life because they have been terminated from their job might seem like an obvious fit for a business partnership, but if they’re not in a stable place mentally and emotionally, this can put additional pressure on you.

You may think that it’s the right thing to try to give them a lifeline and help them out during this difficult time. It might even seem rude to ask about their financial situation. However, this is a critical step that you must take in order to ensure the success of the business overall. If you aren’t willing to take these steps to verify that you’re both on the same page and have the same goals and vision, you could be setting yourself up for a future of confusion and frustration.

Far too many business relationships and friendships have eroded because people assumed they were on the same page or that they had similar goals and plans. If you ultimately are growing the business to pass it onto a future generation, for example, this can be quite different from a friend who intends to sell it as soon as the business becomes profitable.

These may seem initially like minor differences that you can work out over time, but the truth is that you should know this information upfront so that you can avoid many of the challenges most people have as it relates to dealing with difficult issues in your friendship, as well as the future of the business.

Someone who you have worked with in the past may not be the right choice for going into business together, but the more confident you feel about the plans you have enacted, the easier it will be for you to figure out how to best protect yourself and your loved ones into the future.

Ed Anderson

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Common Name | Uncommon Thoughts

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