The Rules of Mixing Business With Family and Friends

 

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It’s the one business concern that won’t go away. Some observers and seasoned entrepreneurs alike vehemently warn against going into business with family and friends, having witnessed or experienced the negative fallout of relationships and deals gone bad. But there are also a lot of successful entrepreneurs and business owners that have worked with and borrowed money from family and friends every day.

So what’s the one single answer to this question? It might shock you, but there isn’t one. Instead, there are a few patterns that come to light from the myriad of information that is available.

These patterns highlight what’s needed for any relationship, let alone one associated with a business—things like transparency, honesty and trust. In the end, there are two answers to this question.

First, there are legitimate reasons why you should NEVER go into business with family and friends. And secondly, if none of those reasons apply to you, there’s a right way to chase your entrepreneurial dreams with family and friends as partners.

When You Shouldn’t Go Into Business With Family and Friends

If you can’t stand to risk making someone uncomfortable by documenting a financial business transaction, how do you expect to communicate effectively or ask any questions that may upset your business partner?

As attorney and author Mark J. Kohler describes in an Entrepreneur article, “I am constantly amazed at how many people will invest or loan hundreds of thousands of dollars to their neighbor or fellow church member without getting anything in writing … I just hear the constant excuse: ‘I didn’t want to hire a lawyer because it would have made the relationship uncomfortable, and I trusted them.’”

The truth is that Main Street is filled with the corpses of close relationships killed by business deals that ended in lawsuits. The reason they end up there is because the partners in question weren’t prepared to separate their business aspirations from their actual abilities to profitably run a business.

Successful businesses are made based on the decision makers’ ability to put logic ahead of lofty dreams. Unfortunately, relationships are not based on logic; they are emotional, which is why the risk of things going bad is high.

When working with a friend or family member—or anyone else, for that matter— you should be able to be candid and critical with the people who are close to you. If you think you, your friend or family member can’t handle criticism, then getting involved in a business venture is not a good idea.

When starting any business venture, keep in mind two simple thoughts:

1. Every business and investment comes with risk, especially new businesses (only 20% of business owners succeed). If you can’t approach the condition of your business critically, then you should think twice about committing to it.
2. Think about how you would feel if the business affected your relationship(s) in a negative way. Can you reconcile the risks and rewards? Are you okay with losing your investment or theirs? Or, for that matter, are you okay with potentially losing a good friend?

For those who are starting a business or asking for money, think about how you would tell a family member or close friend that the money they gave you, which signified their trust in you, is now gone or in jeopardy of being lost. If you can’t think of what you would do in that situation, think twice about asking for that money.

The Right Way to Mix Business With Family and Friends

If you and your friend or family members are clear on the potential consequences of running a business together, then read on. The following 11 tips come from multiple sources, many of which are provided by people that started businesses with family and friends. All of them should help guide you through the best practices of moving a close relationship into a financial one.

1. Set Rules and Boundaries Early: This advice comes from Amanda L. Barbara ofPubslush in a Fox Business article. The key is to write down what each party expects so you can be on the same page from the beginning. You’re guaranteed to have two different points of view, and no one can read minds, so talk about your hopes, concerns and what-if scenarios, and write them down.

2. Create a Legal Agreement: This document is different from the one described above, as it establishes what each person is putting into the business with respect to investments, including money. A legal agreement also defines what happens if the deal or business does not work out. You don’t want a court to divide your assets and investment for you, so create the proper agreement early to safeguard all parties involved.

3. Relationships Come First: Multiple sources have written about this rule, including Eric T. Wagner in this Forbes piece. He outlines Infusionsoft CEO Clate Mask’s advice that you should always put your relationships first before business. Let this rule be the guiding light in how you deal with family and friends.

4. Relationships Come First, Except When the Business Comes First: This is Mask’s second piece of advice, and it drives home the point that if a family member who is part of your business does something wrong—such as commits fraud or steals from the business—you have to act quickly and get rid of them. If you don’t act, perhaps because your relationship gets in the way, you risk setting a terrible example for everyone else involved, from employees to other business partners.

5. Define What Success Is: This should not be a hard thing to do, but it often never gets discussed. Whether you are giving money or time, or asking for it, make sure you and other stakeholders know what you are working towards and what types of successes to expect.

6. Talk About Time Commitments: Similar to defining success, everyone should know how much time and effort it will take to reach success. But don’t be overambitious, as businesses almost always take longer to develop and grow than their owners and partners may want to believe. Set a wide window, even if you’re sure it won’t take that long.

7. Don’t Be Afraid to Disagree: Business relationships require a ton of honesty because there are always many hard questions that need to be answered and decided on. Disagreements, therefore, should never be personal. They are simply part of how a business works and should be treated as such.

8. Become a Great Communicator and an Even Better Listener: One would think that it would be easier to work with family and friends, but this is not the case. A relationship that is years old has many emotions tied to it. Some emotions are conducive to business, and some are not. Therefore, it is very important to hear what the other person is saying, and it’s equally important to be clear when speaking to other people. Your point will only be heard when you make the other person feel like they are truly being listened to, so listen attentively.

9. Don’t Talk About Work: If you are working with family and friends, learn to separate your work life from your home life. Your relationships will be better for it, especially if you work with a spouse.

10. Think About Culture: If you’re starting a business with family and friends, Cesar Quintero of Fit2Go has some important advice. From an Inc.com article, he says, “I … didn’t have a clear vision of what our culture was and where it needed to be. Instead of creating and sharing one vision … we all started having our own visions for the company and how it should grow.” Cesar had to make some hard decisions about who should be on his team after it was formed. With that in mind, you may have to be more exclusive when selecting your business partners than you originally intended.

11. Don’t Blame Others: At the end of the day, especially a very hard day, take responsibility for your choices and actions. If you gave a family member or friend money, and it’s now gone, that was your choice. If you take money, you have a responsibility to make decisions and live with them. Be accountable, and never point fingers. And above all, find better ways to learn from your experience.

BONUS TIP: From my own experience working with my wife at a photography business, working with family and friends can be a very positive thing. While we have had disagreements, we both know our roles in the business, which makes it easier to let the other person do what they do best. In my case, it gives our relationship a new dimension and has taught us a great deal about teamwork and depending on one another.

Conclusion

There are times when you should never go into business with family and friends, especially when you can’t be honest, clearly communicate or feel awkward about creating clear rules and agreements. But if you can adhere to the rules and tips above, working with family and friends can be a positive experience.