Are you a ‘solopreneur’ considering going into business with a friend? Read this!
Looking at the current market changes, it is even harder for the employed friends to venture into business than it has ever been before. Why would someone leave a permanent and pensionable job, with perks to venture out into the unknown land of entrepreneurship? Why would you start small yet you are already in a plum job with benefits? These among many others is the reason why many would rather not jump ship but rather invest in other up and coming businesses while they get a taste of entrepreneurship. More people are forming partnership within the MSMEs spaces where they are joining established entrepreneurs as silent but deep pocketed partners. Is this a good move? What are the challenges?
I recently spoke with someone who started a small, one-person business in a service field. One of his friends has some good ideas and contacts within the industry and wants to invest. What are some things the business owner should be aware of (or beware of) before accepting the investment and bringing his friend into the company?
“Both parties need to understand that business is inherently risky and should commit to separating any business failure from personal friendship,” says Faruk Abdallah, CEO and co-founder of Suwis Herbal. That advice sums up what every expert I reached out to said about going into business with a friend.
And it is important advice to consider, as Kush Manek, Founder of Soko Yako, stresses. “Adding a partner to your business is perhaps one of the most critical decisions that can spell success or failure for any budding enterprise,” he says.
Yet, in spite of the business world being littered with bits of relationships broken apart by partners who have gone (or been forced to go) their separate ways, there always will be entrepreneurs who opt to bring a friend in.
“The best way to avoid this is to not mix business and pleasure, and keep your personal friendships separate from your business partnerships,” says Abdallah. “But if the friends want to move forward with an investment, it’s better to be honest and clear about what the opportunity is, and about all of the potential risks that come with pursuing the opportunity.”
If you or someone you know is intent on partnering with a friend in a new business venture, asking these questions before taking the plunge can help avoid some of the most common pitfalls of partnership endeavors.
Does the partner bring a unique benefit? “The main thing to consider is whether the new addition will actually bring any benefit to the company that could not be attained without bringing them in as an owner,” Manek says.
Are you willing to risk the friendship? As many former business partners can attest, going into business as friends ultimately can shatter the friendship. “He should be aware that by accepting the investment and bringing on his friend, that person is no longer just a friend, he’s now a business partner — the friendship dynamic is forever changed,” cautions Faiza Ayub, founder of Faizer’s Pickles.
“Regardless of the legal agreement between them, the practical reality is that he is now a guardian of a financial investment from his friend. He should ask himself if he’s comfortable with the potential fallout to his relationship with the friend if the business fails.”
Is there a business strategy in place? This should include a description of each owner’s role and plans for handling any conflict resolution — and it should be in place before taking any outside investment.
“Many times, when it is a friend or relative, there is a trust factor that leads to overlooking key details,” says Zaheed Dewji Founder of Planet Chika Chika, who has been building his businesses for more than 7 years. “Write everything down when it comes to strategy and roles and make a conscious effort to revisit this on a regular basis to make sure that things stay on track.”
Are you protecting your stake in the startup? “Giving up equity stakes can be a real trap if the other party has intentions of taking over or changing the direction of the business,” Abdallah says. “Make sure there’s a healthy relationship maintained on trust, and even then, sign a legal contract spelling out the rights, obligations and responsibilities of the owners.”
Are you prepared to lose your business independence? Gaining a business partner means losing the biggest benefit of being what Zaheed calls “a solopreneur.” That benefit: “He only answers to himself,” Zaheed says. “Does he really want a partner? Does he need a partner? Does the friend bring enough to the table that it’s worth giving up his independence?”
Have you discussed what you don’t agree on? As Zaheed notes, most small business partnerships begin with a conversation about all the things they agree on. “It should be focused on what you disagree on, and if those disagreements are workable or are a bridge too far,” he says. Potential partners should have a long, in-depth conversation about where their viewpoints differ.
“For instance, what do they each think of the idea that ‘the ends justify the means’? Is one of them willing to do anything it takes to see the company succeed, and the other isn’t comfortable with that?” “You would be surprised at the philosophical differences that come up with that question, even between close friends.”
Discovering differences in mindset — strategic, ethical, or even political — is imperative. “All of those differences will come to the surface when things aren’t going well, and by that point it’s often too late — you’re stuck with that person,” Waters warns.
Will the new partner’s role depend on continued involvement? “Often, business owners have a need for a service provider and think it would be cost-effective to make them an owner rather than an employee,”
“Not only is that potentially an ineffective way to get around, it’s also risky if done without safeguards. What happens if the partner stops providing those services? Or the quality drops below expectations? It’s important to know whether the ownership will be contingent on any continuing obligation.
“This is true with an investment, as well. Will there be a continuing obligation to contribute funds? Many of the disputes we see arise out of one partner dropping below expectations and there being no mechanism to address it.”
What will the repayment obligations be? Abdallah says this is an important point that must be clarified from the outset of the partnership. “Is the investor expecting to be paid out before the original owner? Will the owner be able to bring on additional investors and dilute everyone’s interest equally or will there be restrictions?” he asks.
All of these things, of course, are “easier said than done,” Manek admits. But they’re necessary when considering bringing on a friend as a business partner.
“Both parties need to understand that business is inherently risky,” he concludes, “and they should commit to separating any business failure from personal friendship.”