Starting a Business With Your Best Friend

By Features Business on Main

Determined to make business and pleasure mix? These tips can help you navigate starting up with a friend without bringing down the company — and your friendship.

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Finding a reliable business partner can be challenging — we all want to work with someone we’re comfortable with and trust implicitly. So it’s no wonder entrepreneurs often team up with their friends to start a business. But launching a business with your best friends can be risky, and it’s fraught with the potential to destroy your venture — and your friendship.

The mistake many entrepreneurs make (I confess: I did) is to expect behavior patterns in the business to be similar to those of the friendship. And since this is your closest friend, you don’t anticipate any special challenges, so you’re nearly blindsided if they do crop up.

To prevent this and make a business partnership with your best friend work, it’s important to take the time now to identify any possible problems, and take steps to prevent them before they take root.

Sharon Lewis-Bultsma, Psy.D., a licensed clinical psychologist in Fullerton, California, says to watch for these warning signs when launching a business with your best friend:

- A power differential in the business. If the friends have unequal roles in the business, this frequently leads to conflict.

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- A significant difference in initial investment in the business. If one partner has more money at stake, that partner is likely to want a greater say in the business, no matter what his or her official role actually is.

- One or both friends have trouble communicating or dealing with conflict. You’ll need to be completely open about conflicts and problems, both before launching the business and after. “If you let problems or anger fester, it can easily turn into resentment,” Lewis-Bultsma cautions.

To avoid potential problems, Lewis-Bultsma says it’s important to be open with each other from the get-go. “Before going into business together, sit down and start talking,” she advises. “Be specific: What are the expectations of each person? Anticipate possible problems. For example, what if one person wants to hire someone the other doesn't? What if one person wants to leave the business?”

Next, develop a realistic plan for dealing with the potential problems you’ve uncovered, Lewis-Bultsma advises. “Talk about how each person would handle [these issues]. Are both people willing to seek professional or outside help to resolve problems if they need it?”

The way you structure your business is also key to preventing partnership problems, says Charley Moore, founder and executive chairman of Rocket Lawyer. This includes your legal structure, operational structure and financial structure. Moore suggests three steps to keep your business and friendship intact:

1. Treat the business as a separate entity from your friendship. “When you incorporate the business, you will have to sort out ownership,” Moore explains. “Have a frank conversation with your business partner about who is contributing what to the business now, and in the future, and how much you collectively value those contributions. For example, who is contributing money, and how much? Who is contributing time? What about intellectual property? Each of these contributions has some value that should be reflected in the ownership of the business, on a percentage basis. Document this ownership in the form of shares, or units, for a limited liability company.”

2. Document roles and responsibilities. “Decide who has what role up front, and define roles clearly with employment agreements between the business and each employee, even — maybe especially — the founders,” Moore says.

3. Separate bank accounts and business assets from personal assets. “One pitfall of working with a friend is that because of the inherent trust in the friendship, the business partners don't follow basic accounting practices,” Moore explains. “Commingling of funds is something every business operator should avoid, but it’s especially important for friends in order to preserve trust and avoid violations of fiduciary duty that can ruin both the business and the friendship.” Put your accounting process, including signature authority, in writing.

Do you notice that a lot of this advice has to do with talking? That’s no coincidence. “Hands down, the most important factor in making a business [with your best friend] work is communication,” says Lewis-Bultsma. “If you can talk about issues and be sensitive to the other person's feelings and perspective, it goes a long way in resolving problems.”

While talking honestly about sensitive issues may be difficult, Moore says, “The more hard choices you make up front, the better it should be in potentially stressful situations later.” What if you can’t bring yourself to talk about sensitive topics? That’s the biggest sign of all that, no matter how tempting it may be, you shouldn’t partner up with your best bud.

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