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What to Know About Going into Business with Friends. Is it a good idea?

You love spending time with your friends, and you all have been mooting the idea of becoming entrepreneurs together. You have that million-dollar idea, and you can’t wait to see your dreams manifest. However, it all boils down to the ultimate question: Could you and your friends make the perfect business partners?

The answer may be more complicated than you think. On the one side, companies like Airbnb and Ben & Jerry’s are successful companies. Their founders started from friendships. However, on the flip side, a Harvard Business School study showed that among technology founders, the group that is made up of friends proved to be the most unstable. Sadly, the businesses that fail also leave ruined friendships in their wake.

The fact is, working with friends can be a fantastic experience. But, it can also be a real challenge. You’ll find that the very same benefits we derive from friendship can also cause major potential problems when we transport those friendships into the less forgiving world of business.

An excellent place to start is to ask hard questions. These questions should be asked and answered before jumping into your business plan. The questions can be tough to ask and answer, but they could save your friendship from a business relationship gone sour.

In the post, we’ll take a look at the pros and cons of starting a business with your friends and tips to thrive if you do.

Pros
You have a business partner that you genuinely know and trust
Your friend is someone who you have known for a while. You know how they react to certain things. You know what their belief systems are founded upon. You undertake their abilities and what can trigger their tempers. This knowledge can be precious when starting a business. You’d be able to solve problems by intuitively drawing on your respective strengths and treading lightly on known character flaws.

You can communicate better

If you have built a genuine friendship over time, your communication channels with each would be vast. All the memories you’ve shared, the playful insults, and life events contribute to this channel. In addition, this trait is beneficial for some profound articulation of business goals and strategies.
You can assign and assume roles naturally.

You and your best friend know exactly which specific role in the company you will both be best suited for. For example, you can be the technical person while your friend is the natural administrator. You are also aware of other skills that might come in handy as your business grows.

Cons

Familiarity breeds contempt
Knowing so much about one person can sometimes erode mutual respect. This is similar to the struggles within marriages. Sometimes, because you’re so embedded with the knowledge of one another’s personal lives, you take each other for granted. Unfortunately, this might hurt the business.
Emotional decisions

For example, it is possible that one partner frequently slacks off and thinks the other will consistently pick up the slack. Because you don’t want to hurt your friendship, the business will incur the cost. Endorsing unproven or incompetent friends to be part of your business will all but guarantee failure.
Ego Clashes

Everyone suffers from “Who’s-Really-the-Boss” Syndrome. Unless roles are very clearly defined, a 50-50 business partnership carries the risk of leadership ambiguity. This can quickly trigger power struggles, affecting all aspects of the business, including differing opinions on the company’s vision, strategy, and daily operations.
Tips for Starting a Business with Your Friend

Be professional while staying friends.

Always assume a high degree of professionalism when it comes to business matters. This is better than trying to keep your friendship totally out of business. Embrace your strong bond together but keep it professional. For example, refrain from joking about serious financial matters that’ll impact your business.

Establish your goals and roles

From the very beginning, establish a chain of command and clearly define the goals of the business. Once you know what you want to achieve together, you can ultimately articulate what is required from each stakeholder. It would be best if you assigned clear responsibilities for who will be managing each part of your business to hit that high target.

Separate your personal finances & perform appropriate bookkeeping

This point is very vital. Never mix your personal finances when starting a business partnership, especially with a good friend. Ensure that you have financial best practices in place to ensure there’s no mismanagement of company funds.

Agree on possible exits, outcomes, and discuss the likelihood of total failure

The fact is that well over half a million businesses shut down each month in this country. Failure and loss of your initial investment is a very real possibility. If you and your partner lose your business investment, is that going to ruin your friendship? Have an open conversation about that scenario and talk through how you’ll both feel sitting on the other end of that somewhat likely outcome. Also, on what terms will the partnership be dissolved if things don’t go as planned? Agreeing on this from the start will prevent a very messy separation.

Incorporate a business entity

You could register as a partnership, limited liability partnership (LLP), corporation (Inc), limited liability company (LLC), S-corp, or other business entity. You should choose the structure that best represents your business and your eventual goals. Regardless, it would be best if you defined ownership very clearly.

Make it Official with Contracts

Once you’ve worked through any complications, put it all in writing. If things were to go wrong, you’d reference documents and written statements in court. To do this, contact a lawyer and draft up a business plan. Any business promises you make should be in writing for any miscommunications. Compensation rates, profit shares, investment contributions, and business accounts are a few things that should be on this document.

Takeaway
Starting a business with your friends can be a rewarding experience. Creating something from nothing and helping it grow is a fantastic experience, and it’s even better when you can do it alongside people you genuinely like.

But, it isn’t always easy. Sometimes your strengths as friends can become your weaknesses as a business. But if you take everything above into consideration and plan intelligently, you’ll be in a great position to succeed.

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