[Editor’s Note: This is a republished post from Passive Income MD (PIMD), the newest member of The White Coat Investor Network. This one hits a tricky subject, mixing business with pleasure by partnering with friends. The original post ran here, but if you missed it the first time, it’s new to you! Enjoy!]
Just from reading the title of this post, I’d be willing to bet that some of you are already shaking your head. We’ve all heard the old adage, “don’t mix friendship and business” and that’s generally good advice. Some people will go as far as to say that the easiest way to lose a friend is to go into business with them.
Yes, there is some truth to it all, but believe it or not, good partnerships are actually possible. Sometimes it can even result in a good deal of synergy.
Why Go into Business with Friends?
Capital
Time
If you’re a full-time working physician and looking to take on a side hustle, you may simply not have the time to take on the entire project by yourself. This isn’t exclusive to physicians, either. If you already have a full-time job or a family (or both), sometimes you need a friend or partner to help shoulder the responsibilities.
Fear
Maybe when it comes down to it, you’re a little bit hesitant to start a new venture alone. Let’s be honest, most of us are only trained to follow one career path. When it comes to trying other professional ventures, it’s “learn as you go.”
Going into business with a good friend can appealing because you’re in it together. The added benefit here is that you learn from them, they learn from you, and you both likely learn faster and more efficiently about how to run that business.
Trust
The previous are all good reasons, but really, the best reason to have a friend as a business partner is the most important aspect of a partnership, TRUST. When you partner with a friend, if it’s a true friend, that trust has already been established.
Fun
Friendships are based on mutual interest, values, and perspectives. For some, there’s no better way to cultivate those things but to go into business together. How many of you have sat together over dinner and cooked up fun business ideas? Talking about it is fun, and the building process can be fun as well. Many great businesses today were created in that same way – friends talking about how to make things better or change the world, ex. Apple, Facebook, Google, etc.
Have I Formed Business Partnerships with Friends?
- Bought an apartment building
- Invested in fix-and-flips
- Invested in real estate syndications operated by friends
- Angel invested together – we’ve pooled funds and invested in startups together
- Angel invested directly in companies run and operated by friends as an early investor
Now, admittedly, these ventures have not always gone perfectly smoothly and are not without occasional issues. But we’ve been able to navigate past those (knock on wood) and the business relationships and friendships have been strengthened because of it.
Tips for Working with Friends
So, if you’re considering going into business with a friend, here are some tips I’ve picked up through my own experiences:
Establish the Business Relationship in Writing
This can be in the form of an LLC or legal entity. It is extremely important to talk through all the logistics of your partnership – dissolution, addition, what if someone wants out, etc. If a problem arises, everything will already have been outlined and agreed upon on paper, so conflicts and misunderstandings are much more easily resolved.
Establish Regular Meetings
We’ve all heard of the importance of communication in relationships. In business, just like it is with spouses, if there isn’t constant communication, misunderstandings arise and resentment can begin to seep in. Make sure to specify times and places to discuss things. Make sure you’re still on the same page, and if you’re not, find out why.
Establish That Your Friendship Takes Priority
…and be willing to talk about dissolving the business if necessary. Remember, your friendship is your first priority. Communicate early and often that if things start to sour, an honest conversation about whether the business can continue to thrive needs to happen. Be willing to chalk it up as a learning experience and leave it at that. The important thing that is that you’re able to walk away with your friendship intact. At the end of the day, a good friendship is far more valuable than any amount of money.
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.
My biggest financial loss as an investor came from investing with a friend. We ventured into a territory we didn’t really know. He knew more than me. The product we were selling was great and loved. It just never took off enough to make us a profit. Neither of us was knowledgeable enough in marketing and I think that was the downfall. Eventually the business closed, having never made profit. I lost the initial investment and the money I could have earned had I put it into an index fund. That lost opportunity exceeded a million dollars. Had it not been a friend who approached me, I doubt I would have ever entered into that business. I think I didn’t make a smart decision because the friendship carried weight with me. Be sure when you are approaching a business deal with a friend, that you evaluate it the same as you would every other deal. Don’t let the friendship sway the business decision. Be sure you would have made the investment even if it was not with a friend.
Dr. Cory S. Fawett
Prescription for Financial Success
Ouch. A 7-figure loss had to be tough to swallow.
I would consider any investment into a business with friends to be “play money” of no more than 5% to 10% of your portfolio. To invest more, I’d have to have extreme confidence in the business (and good reasons to feel that way).
Condolences,
-PoF
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?