5 Essential Tips to Start a Business With Your Friend

Sitting around a barbie and reminiscing about your childhood adventures together, are the type of things friends do. Friends are friends because of shared passions, shared interests and shared histories.

It is very easy to think that friends will be good at running a business together. But history has shown that this is not always the case. And while not all relationships are the same, these are things you should know when going into business with friends:

1. Very few friendships survive a failed business venture

While starting a business with a friend can be a great experience, many friendships have been scarred for life following a failed business, despite pure intentions. Familiarity with each other’s personal lives may affect the mutual respect necessary to make the business relationship work.

2. You’re not friends anymore, you are business partners

Paying debts, employees, each other and sometimes covering the costs of ‘bad’ decisions proposed by your friend, will become the new normal in your relationship. Your relationship is likely to be categorised by budgets, bank and BAS statements, debtor ledgers, lease documents and the inside of an accountant’s office. Friday nights watching footy are likely to be replaced by discussing new sales, tenders or cutting expenses – while still watching footy (hopefully). 

3. ‘Shared passions’ doesn’t mean ‘shared business values’

A good friend does not always equal a good business partner. Here are some of the good characteristics to look for when beginning a business relationship with any person:

• Integrity
• Strong work ethic
• Perseverance

Here are some of the bad characteristics:

• Talker (but no action)
• Egoistic (not willing to learn)
• Too passionate (i.e. not applying diligence and care in decision-making)

Do not be blinded by your friendship; truly evaluate your friend and if they don’t make the cut – don’t do it!

4. Be willing to have awkward discussions at the start

Who is the boss?  50-50 business relationships are always at risk of having leadership uncertainty. Roles must be clearly defined in writing (see point 5). Having clear expectations of contributions and responsibilities within the business is essential to avoid discontent. There is nothing that kills a business relationship and a friendship quicker than accusations of “disproportionate contributions.” The only outcome is resentment.   

5. In writing

Finally, get all things in writing. Make sure that you pen down your relationship while you are still “good friends.” Include appropriate terms in a partnership or shareholders agreement that clearly stipulate how the business will be divided and what will happen in the event of disagreement, or one party wants to quit or when one party passes away or becomes incapacitated. 

If you're considering going into a business with a friend, please contact Philip van den Heever at philip@franklaw.com.au. 

This is not legal advice. 

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