Forget What You’ve Heard
The cliché about not going into business with friends is an odd one when you think about it. After all, are you going to go into business with complete strangers?
Plenty of successful startups have been started by friends. Google was founded by Sergey Brin and Larry Page when they were students at Stanford. Steve Jobs, Steve Wozniak, and Ronald Wayne launched Apple in 1976. These companies all ended up doing pretty well, and most of the founders remained on speaking terms.
Can you guarantee your friendships will survive launching and running a business? No. You can, however, take certain steps that tilt the odds in your favor. Should friends start a business together? Here’s how to go about starting a business with friends.
Friendship vs. Business
Put simply, what is more important to the founders – your friendship or your business? In theory, both should be able to co-exist in a perfect world. You should know by now we do not live in such a world. A close friend of mine has started three businesses with friends. He no longer speaks to any of them and regrets it. You need to consider carefully whether you might feel the same way if things don’t work out and people leave in a huff.
History of Disagreements
How often do you and your friends disagree with each other in your social relationships? Running a business is going to lead to significant and occasionally severe differences. If your group has a history of working through disputes, then you can carry this over to the business environment. If not, you run the risk founders will be unable to compromise when it is time to make critical business decisions. Such stand-offs can bring a company to its knees and are often only resolved through court proceedings. Suing each other is an effective way to ruin a friendship!
While there is no hard and fast rule on this topic, my observation is businesses started by friends who have different skill sets tend to have a greater success rate. Consider an online marketing company started by three friends. The chances of the company being successful are going to be far better if the founder breakdown is:
- SEO master
- Social media master
- Web design/programming master
Then if the founder breakdown is:
- SEO guru
- SEO guru
- General marketing savant.
Founders with the same skills often end up in conflict. For example, two founders who are SEO gurus may know how to rank sites, but go about the process in very different ways. How does the business choose between their two approaches? Moreover, how bitter and useful will the “loser” be to the company?
Exit strategies can also be an area of concern. Standard exit strategies include:
- Take the company public,
- Sell the company, or
- Passing the company on to future generations.
It is vital all the founders agree on the exit strategy goal before launching the business. Not only is it important to make sure everyone is rowing in the same direction, but an agreed-upon exit strategy will clarify the answer to certain difficult business decisions. Should the business invest capital in a project that is forecasted to take 10 years to bear fruit? If the founders have set a goal of selling the company within five years of launch, the answer is pretty clear – no.
Get It In Writing
A business is, well, a business.
It needs to be run as one.
Friends who go into business together have a bad habit of treating the company like a plaything. Not sure if your group might suffer from this problem? Listen for statements such as:
- “Ah, we can figure it out later.”
- “I trust you. We’ll put it in writing later on.”
- “I’ll just take care of it on my own.”
These types of statements suggest an informality that is inappropriate in a business environment. This inappropriateness leads to an inherent lack of organization, which translates to serious day-to-day problems running the company.
Before you spend a single dollar, the founders must agree to operate the company as a formal business. This means:
- Putting all agreements in writing,
- Establishing and following formal business procedures,
- Being present during regular business hours, and
- Establish budgets.
This list should obviously be longer, but the point is the venture needs to be run “like a real business” because it is a real business.
Finally, a bit of practical advice:
Make sure to spend time apart from each other.
The more time you spend together, the more little nagging things can blow up into major annoyances. Much like in a marriage! Don’t let this happen. Use weekends to get away from each other for at least a day. This time apart allows everyone to take a deep breath, gain perspective and recharge for the coming week.
Should friends start a business together? Going into business with friends is not the automatic mistake many commentators make it out to be.
Contact me to get guidance to evaluate whether you should take the step.
Richard A. Chapo, Esq.
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