How To Go Into Business With A Friend
Thinking of launching a business? Partnering with a friend can seem like a shortcut to success, but it's a decision fraught with potential pitfalls. Navigate these treacherous waters carefully or risk losing both a friendship and a fortune.
The allure of shared responsibility and pre-existing trust often overshadows the crucial groundwork needed for a successful business partnership. Ignore the essential legal and operational considerations at your peril.
Assess the Friendship and Business Compatibility
Before drafting any business plans, seriously evaluate if your friendship can withstand the pressures of entrepreneurship. According to a recent Harvard Business Review study, 70% of business partnerships fail, with interpersonal issues being a primary cause.
Ask yourself: Can you have difficult conversations without taking it personally? Do you share a similar work ethic and vision for the company? Honest answers are critical.
Define Roles and Responsibilities
Lack of clarity regarding roles is a breeding ground for conflict. Clearly outline each partner's responsibilities, areas of authority, and decision-making power.
Consider a skills audit – identify each partner's strengths and weaknesses to strategically allocate tasks. This will help to avoid overlap or gaps in crucial functions.
Legal and Financial Framework
A solid legal agreement is non-negotiable. This isn't about distrust; it's about protecting both parties in the event of disagreements or unforeseen circumstances.
The partnership agreement should clearly define ownership percentages, profit-sharing arrangements, and a dispute resolution process. According to Forbes, consulting a lawyer specializing in partnership law is an essential investment.
Establish a formal business structure (LLC, partnership, etc.) and open a separate business bank account. Commingling personal and business finances is a recipe for disaster.
Capitalization and Funding
Discuss how the business will be funded. Will each partner contribute capital? Will you seek outside investment? How will future funding needs be addressed?
Document all financial agreements meticulously. A clear understanding of financial obligations is essential for maintaining trust and avoiding resentment.
Communication and Conflict Resolution
Establish regular communication channels and a system for addressing conflicts constructively. Schedule regular meetings to discuss progress, challenges, and future plans.
Implement a formal conflict resolution process. This could involve mediation or arbitration by a neutral third party. Addressing conflicts early and effectively is crucial for preventing them from escalating.
According to a Small Business Administration report, businesses with strong communication strategies are 25% more likely to succeed. Don't underestimate the power of open and honest communication.
Exit Strategy
Plan for the eventual dissolution of the partnership, even if it seems premature. What happens if one partner wants to leave? How will the business be valued? What are the terms of a buyout?
Including a buy-sell agreement in your partnership agreement can prevent future legal battles. This agreement outlines the process for one partner to buy out the other's share of the business.
Thinking about these scenarios upfront can save significant time and money down the line.
Next Steps
Don't rush into a business partnership based on friendship alone. Do your due diligence, seek professional advice, and establish a solid legal and operational foundation.
Contact a business lawyer and accountant to discuss your specific situation. The upfront investment in professional guidance is a small price to pay for the long-term success of your venture and preservation of your friendship.
