I recently spoke with someone who started a small, one-person business in a creative field. One of his friends has some good ideas and contacts within the industry and wants to invest. What are some things the business owner should be aware of (or beware of) before accepting the investment and bringing his friend into the company?
“Both parties need to understand that business is inherently risky and should commit to separating any business failure from personal friendship,” says David Waring, CEO and co-founder of Fit Small Business. That advice sums up what every expert I reached out to said about going into business with a friend.
And it is important advice to consider, as Scott Hasting, co-founder of Betworthy LLC, stresses. “Adding a partner to your business is perhaps one of the most critical decisions that can spell success or failure for any budding enterprise,” he says.
Yet, in spite of the business world being littered with bits of relationships broken apart by partners who have gone (or been forced to go) their separate ways, there always will be entrepreneurs who opt to bring a friend in.
“The best way to avoid this is to not mix business and pleasure, and keep your personal friendships separate from your business partnerships,” says Waring. “But if the friends want to move forward with an investment, it’s better to be honest and clear about what the opportunity is, and about all of the potential risks that come with pursuing the opportunity.”
If you or someone you know is intent on partnering with a friend in a new business venture, asking these questions before taking the plunge can help avoid some of the most common pitfalls of partnership endeavors.
Does the partner bring a unique benefit? “The main thing to consider is whether the new addition will actually bring any benefit to the company that could not be attained without bringing them in as an owner,” Hasting says.
Are you willing to risk the friendship? As many former business partners can attest, going into business as friends ultimately can shatter the friendship. “He should be aware that by accepting the investment and bringing on his friend, that person is no longer just a friend, he’s now a business partner — the friendship dynamic is forever changed,” cautions Steve Waters, founder of CONTRACE Public Health Corps.
“Regardless of the legal agreement between them, the practical reality is that he is now a guardian of a financial investment from his friend. He should ask himself if he’s comfortable with the potential fallout to his relationship with the friend if the business fails.”