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Seven things to know before starting a business with a friend

Seven things to know before starting a business with a friend

Avoid emotional decisions...

The idea of starting a business with a friend will always be appealing to most people because of the shared level of understanding and trust. However, the reality is that getting into business with a friend is often an emotional rather than a business decision.

Sanjeev Orie, CEO of Value-Adds at FNB Business says even though it seems ideal to start a business with a friend, there needs to be rational thinking so that decisions are made for the good of the business rather than the friendship.

“A joint business venture between friends requires a lot of emotional maturity because business decisions are neither fair nor just at times. For an example, if one friend insists on being in charge of finances when he or she has no adequate skills to properly manage such duties, the other partner will need to make a rational decision to avoid a potential disaster in cashflow management.”

According to Orie, the trick to ensuring that a business venture with a friend becomes successful is to take care of the following basics:

Define the partnership

  • It is advisable to understand what the partnership entails and how much decision-making power each partner will have. In most cases, people choose a 50/50 split but this could also be decided based on the amount of investment each partner is willing to make.

Formalise the partnership

  • Get the services of an attorney to draft a business agreement to guide how the entity will operate. Try not to have any ‘grey areas’ because those often lead to business conflict.

Clarify roles

  • Decide who does what so that you do not tread on each other’s territories. We all have individual strengths, so it will be better to match each partner to responsibilities which complement their skills set.

Do not assume that one of you has to be manager

  • Even though the business idea may be yours, you might not have the right skills to run it. If both partners feel that a third-party may be better equipped to run the business, the best idea would be to appoint that person as opposed to taking an uncalculated risk. Delegating management duties does not mean you will lose ownership of the business.

Friendship takes a back-seat

  • Business decisions should not be made to simply preserve the friendship - they should be made regardless of the friendship. This is often easier if there is a third-party that has decision-making powers without any actual ownership in the business.

Keep all hands out of the cookie-jar

  • The business is not your personal loan service so it should not be the first place to turn to when you need a bit of money. If a business is profitable, both partners will obviously make some money but they still need to ensure that the business is an independent entity and not their ‘cash-cow’ for financial needs that will not benefit its growth.

Exiting the partnership

  • If one partner wants to sell their share of the business while the other wishes to continue operating, there needs to be a clause that will govern how this happens, otherwise a misunderstanding could lead to conflict. In most cases, the exiting partner usually gives the remaining partner the first right of refusal but this is not cast in stone.

According to Orie, if a business partnership between friends is well thought out, there could be great benefits. “It is important to remember that starting a business should not be about friends but should simply be based on a viable business idea and both parties need to have the emotional maturity to sustain a business venture. Some of the world’s best entities such as Apple were started by friends”.