By Dr. Jim Dahle, WCI Founder
It's been said that a partnership is the only ship that won't sail. Mixing finances and business with family and friends is a good way to lose money and damage relationships. The problem with a partnership is the natural human tendency to view your efforts and contributions as being larger and more important than your partner's.
If you really want to have a problematic partnership, split it 50/50. At least in a partnership with a clear majority partner, there is an obvious boss who calls the shots. The minority partner might not like the outcome, but the fight will end quickly.
Other Options Besides a Partnership
While a partnership might be the first business structure that comes to mind when you think about working with someone in a business, there are other options.
As mentioned above, a partnership with a majority and a minority partner can clarify disagreements about what will be done when the partners have different opinions.
The business can also be set up with one owner and one employee. The right employment contract is likely to be an acceptable option even for the employee. Including stock options (for a corporation) or a profits interest (for an LLC) solves the issue of the employee not benefiting from substantial business growth. Bonus structures can also help to align interests. Creativity can eliminate a lot of future problems that predictably show up with the “default” 50/50 partner structure.
More information here:
What My Finances Would Look Like Without WCI
Financial Changes When You Make Partner
Why Being in a Business with a Friend Can Be Helpful
It's easy to understand why people want to go into business with their friends. There are a lot of advantages.
Trust
Trust has already been established, and trust goes a long way to solve problems. When you know someone will do anything for you, you feel as though they'll be less likely to hurt the business that you partially own. Trust is like a bank, and if you make little deposits for years and years, there will be enough in there to make a big withdrawal from time to time.
Time
One reason people take on a partner is simply because they don't have the time to do it all themselves. Splitting the time required to be inserted into the business may make the otherwise impossible business possible—or at least easier.
Capital
Just like time, capital is a limited resource. For the same reason a startup may bring in investors, a small business may bring in partners. In many partnerships, one partner provides more of the time and the other partner provides more of the capital. That's not necessarily a problem so long as the agreement of what each partner will do is clear and in writing.
Expertise
We all have different skill sets, and this is one of the best reasons to go into business with another person. In the best partnerships, each member specializes in what they do best.
Fun and Companionship
There's a reason the two of you are friends, and business can be scary. It's less scary when you share it with somebody else. Business can be a lot of fun. You'll spend a lot of time together. Some business partners become friends over time, but why not start with a friendship already in place?
More information here:
Why I Gave My Business Away; Pros and Cons of Adding a Spouse to LLC
Tips for Working with Friends
If I haven't yet managed to talk you out of a partnership or if you've decided to still work with friends on a business in a different structure, here are some tips.
Written Agreement
The most important part of any partnership is the people in the partnership. Go into business with the wrong people, and it doesn't matter how well-written the contract is. That said, the more clear and comprehensive the contract or partnership agreement is, the fewer problems you will see down the road.
Like any good contract, first agree verbally about what you want to do and then make sure the contract encapsulates all of the verbal agreements. An experienced business attorney can likely make some additional suggestions for what to consider and include, but discuss these verbally rather than surprise each other with contract clauses. Whether it's an LLC operating agreement, a partnership agreement, or an employment contract, each partner should have it reviewed by counsel whose only fiduciary duty is to that partner. This agreement should clearly state how future disputes should be resolved, avoid vague language, and specifically describe how and when the partnership will break up.
Frequent Meetings
Any relationship and any business requires time. Meet regularly to discuss the business. Tackling thorny issues early before they grow out of control can keep them small.
Prioritize the Friendship
It really helps when neither friend needs the money. However, that can be difficult—not only when the business is doing poorly but also when it does surprisingly well. While both partners might have been financially independent when the business started, if it grows to become a large percentage of their wealth, there is still something worth fighting over. A commitment to the friendship first, coupled with a spirit of generosity, goes a long way.
Continue to Do Friend Stuff
Over time, the relationship often changes from being friends into being business associates. It's still critical to maintain the friendship by doing non-business activities together frequently. Go on trips and engage in the activities you did before going into business together.
Ideally, the underlying friendship makes for a stronger business, but the business may also deepen the friendship. Communicate well, act with integrity, plan carefully, and be generous, and going into business with a friend might be the best decision you ever made.
Be very wary of getting into business with friends. My lesson has lost me 25k, or over 75k if I had left that money in index funds. I opened a Edible Arrangements franchise with a friend. I learned a hard lesson that a good manager does not always equate to a good owner. She ignored the financial plan we had, and after six years, she still cannot read a balance or income statement and understand it. If you do enter into a business with a friend, make sure the business agreement is solid, mine was weak, gave too much power with very limited accountability to my partner/friend. My end results are a hard 25k education in how to not run a business and many sleepless nights, along with the loss of a friend.
Wonder how many physicians have entered into the franchisee market, for various businesses.
I am entering a fast food QSR concept with a friend in few weeks. Already signed the franchisee agreement, working on the ground lease 🙂
I hope it works out great for you!
I have done it. So you got n=2 physicians atleast. Successful (so far).
Similar challenges going into business with family. I did a small F&F round in the 90s starting my last company. I set things up as a c-corp and issued shares to make it very official. I’m glad I did because it keep everything nice and clean – no issues there. Where I did have an issue was hiring my brother. Actually, hiring him was fine, it was when I had to let him go. That was hard. Don’t think I’d want to hire another family member again.
Timely post for me, but on the family side. My sister is an artist and architect and we’ve been thinking about starting a business to sell her art. Seems risky though to sour the relationship with a sibling. I don’t need the money and would be doing it to scratch the business itch and get to know her better while promoting her passion. I’m still not decided.
What’s the risk? If you’re okay losing what you’re risking, then go for it.
It seems like something like that could be bootstrapped and run out of a basement to me, no?
Bootstrapped for sure, no basements in the south but her studio is already up and running so that’s solved. She would need cash and money-side advice things from me. I’d have to learn some things, but that’s part of the fun.
To your point about establishing that family is priority, that would be the key. If it doesn’t work out, we’re closer for it and I don’t really need the money as I mentioned. I wouldn’t allow her to go in more than a few hours per week to start so that she isn’t dependent on the success/ruined by the failure. A true side-hustle for the both of us. My mom even wants to get in on the office manage part of things.
I’m risk averse to a fault, but hey, no time like the present.
Glad I dropped a comment, most enlightening.
I’m not sure you and I are using “bootstrapped” the same way. In my opinion, bootstrapped means no borrowing money or seeking an equity partner. Basically putting in a lot of sweat equity, running it out of your house until you’re making enough to pay for a studio etc, only buying stuff as you can pay for it etc. Obviously it’s a spectrum between that and borrowing to the hilt and building a super nice studio.
I guess I would give her money until the Business was self sustained. I would expect some money eventually. I don’t know much about these things and the idea is in infancy.
What you’re suggesting seems that she would not need me. She would just grow it on her own. I would give her money upfront to expedite the growth. If the money was lost I would be ok with that. So I suppose I would be an equity partner?
You could be an equity partner or simply a lender. Honestly it sounds like you’re just gifting her some money to me since you don’t seem to be taking it very seriously as a business. That’s fine, just make sure everyone is clear up front about what is happening. Probably ought to even put it in writing so there is no confusion later.
I have some reading to do on the whole thing. Got any good books or posts?
Before entering our family partnerahip, I wish I had read The Partnership Charter: How to Start Out Right With Your New Business Partnership (or Fix the One You’re In) by David Gage. Lots of learned lessons here: 1. Do not have 50/50 partners or anything that could add up a tie (we have been stuck too many times with our 50/25/25 deal), 2. Do as much or more due diligence on the partnership & expectations (for relationship & business) as you do on the business.
Had to quip before even reading – here’s a tip- DON’T.
I personally would avoid being in business with a friend. It’s like lending a friend money, if he/she can’t pay it back you lose a friend. I would rather have just given them the money.
That being said, I have made friends with my business partners and their families, therefore this outline is what I would also suggest. Make it business with agreements, understandings etc.