Should friends go into business together? While business conflicts have irretrievably broken some friendships, many more friends have created successful businesses without hating each other. Read these tips if you are starting a business with a friend.
Get it in Writing
If you don’t do anything else, put your business agreement in writing. This means a shareholder’s agreement if you are a corporation, a partnership agreement if you are a partnership, or an operating agreement if you are an LLC.
Why? A written agreement defines:
- how you will share the profits
- how much voting power you have
- how existing owners can exit the business
- how new owners can enter the business
- and many other essential functions of your business.
Clearly define your roles
Entrepreneurs wear many hats. It can be difficult to determine who is responsible for which function.
In the beginning, decisions are made on an informal basis – often a conversation without a formal meeting. As the business grows, however, these informal conversations and shared decision-making will become impractical. You will need to define specific roles for each owner.
Choose roles based on each owner’s strengths and interests. If no one likes a particular role (ex. regulatory compliance, bookkeeping, website content), outsource this job. There are other efficient and effective avenues to perform the unwanted duties.
Why should you clearly define roles?
- Prevent duplication of effort
- Avoid dropping the ball because each thought the other was doing it
- Reduce conflict by agreeing to accept the other’s decisions in his or her designated role
Choose a boss
Few (if any) businesses successfully run by consensus or by majority rule. Yes, exceptions exist, but for most companies, it doesn’t work. The reason is that someone must make the ultimate decision. Otherwise, when you disagree, business comes to a standstill. Neither situation is good for business.
Clearly define your compensation
There are many ways to contribute to a business. Are you the mind and strategy behind the business? Did you provide the money to start the business? Maybe you have the technical skills necessary to produce your product. Perhaps you have the business connections to obtain financing.
Regardless of what you bring to the table, it is natural to overvalue your contribution and undervalue your partner’s contribution. You must determine how to share the business profits and also whether to pay a ‘salary’ for specific services performed for the business.
There is no ‘right’ way to do this. Each situation is unique. However, an attorney who specializes in this (such as Concerto Law) has seen enough variants to wisely guide you in setting up a fair compensation scheme.
As your business grows, you have to transition from inform, on-the-fly conversations, to scheduled meetings for a defined purpose. You will have to begin recording your decisions (whether on paper, text, or app) so all parties involved can be on the same page.
Business with friends is not for the passive-aggressive. You need to speak up when you feel that the other partner is slacking off. You also need to have a heart-to-heart when you are overwhelmed, out of money, no longer interested in the business, or whatever else impacts your effectiveness at work. If you cannot communicate, your business will fail.
Undoubtedly, conflicts will arise in both your personal and business relationships. You must determine which conflicts are worth ruining a friendship and business partnership. Some are – such as embezzlement or your partner sleeps with your spouse – and you have to walk away. Other conflicts are, in the grand scheme of business and life, a small bump in the road, such as a disagreement over product promotion or hurt feelings from an unkind remark.
Have an exit strategy
It is a downer to talk about exit strategies, but it is necessary.
- What happens if you have a falling out and must part ways?
- What happens if an owner divorces, dies, is disabled and cannot work?
- What if you lose interest in the business and want to leave?
- What if the business fails?
You need to have a frank discussion about these matters and a plan. Will you close the business and part ways? Why one owner buy-out the other? Who will be responsible for the debts? Think of the possible scenarios and make a plan.
Need help? Have Questions?
Attorney Christine Kuntz with Concerto Law works with new business owners and is excited to discuss your business with you and your partner. Call today at (814) 706-1288.