December 04, 2017 | Posted in:

When Friendships Turn into Business Partnerships

Survey small business entrepreneurs and you’re sure to discover relationships that soured when long-time friends became business partners. Fortunately, the story doesn’t always end on a tragic note.


Benefits of going into business with a friend

Instead, starting with a strong friendship can actually be beneficial to your joint business venture. Here’s why:

  • Friends can talk openly. Because a foundation of trust has been established, friends have already learned to communicate candidly. When tough business decisions need to be made, they can discuss choices without wondering how criticisms will be construed.
  • Friends capitalize on each other’s strengths. One partner may love recordkeeping but tend to avoid dealing with the public. The other, a crackerjack salesman, may struggle with accounting minutia. As friends, they can capitalize on one another’s strengths to advance the company vision while minimizing internal squabbles.
  • Friends are committed. Friends care about each other, and will often go to lengths to work out differences because they’re committed to the friendship. They also typically have an understanding of each other’s’ top priorities, and are willing to help in reaching goals.


How to protect your friendship and your business

No significant business relationship should be undertaken lightly or blindly. With the help of skilled advisors, initial expectations about the company should be committed to writing. This includes laying out the details of operational roles, capital investments, working hours, exit strategies and other crucial aspects of the business. Even among friends, clearly written policies can prevent future misunderstandings.

“A formal written operating agreement is important,” Associate Partner Julie Strohlein, CPA advises. “In addition to detailing operational roles, it should also specify the form of organization (partnership, LLC, etc.), how income will be divided, and what will happen if one of the owners dies.”


Depending on your timeframe and industry, consider performing a beta test: a pilot project you can complete jointly before launching a business together. Along the way, ask these three questions:

  • How do you handle disagreements?
  • Does one person always take the lead?
  • Can you easily switch leader and follower roles as circumstances dictate?


Test your relationship in a real-world setting. Observe how well you work together and make adjustments before the firm starts operations.


Other considerations

One more question worth pondering: is your potential business-partner friend in a stable position in life? If he or she is working through the aftermath of a divorce or climbing out of financial debt, consider postponing the launch of your business. If possible, start operations without major distractions.

“When considering which form of organization is right for your new venture, there are many factors to consider,” Julie points out.  “Will all of the investors be active in the day-to-day operations?  Is legal liability a big concern?  Is it likely that some investors will want to leave and others be admitted during the life cycle of the business?  What is the overall tax situation of the owners and how will this new venture affect that?”


If you’d like more advice about creating a successful business partnership structure, give your Alloy Silverstein accountant and advisor a call.



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